Abstract

Empirical studies on stock returns and volatility have not made serious attempt to examine these two issues on the context of Islamic and socially responsible stock market indices. This paper therefore investigates the behavior of returns and volatility of three Islamic and socially responsible stock market indices, Dow Jones Islamic Market Index (DJIMI), DJSIW, Financial Times Stock Exchange Global Islamic index (FTSEGII) and Financial Times stock exchange For Good (FTSE4G) that are listed in the USA and United Kingdom, respectively. The paper examines four main issues: (i) whether there is a difference in returns among these screened stock market indices, (ii) whether there is a risk premium in each stock index, and (iii) whether these indices face the leverage effect risk. The empirical investigation is conducted by means of the Generalized ARCH- GARCH model (GARCH-M) using daily data covering the period from January1999 until October 2007. Not only does the results show no significant difference in their returns, risk premium is found to be absent in each Islamic stock index. All the screened indices reports leverage effect, indicating that bad news has more effect on price volatility than good news.

Key words: Screened index, socially responsible, Islamic indices, generalized ARCH (GARCH), exponential GARCH (EGARCH).