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CANONICAL INVESTMENT: AN CANONICAL INVESTMENT: AN EMPIRICAL STUDY OF DOW JONES EMPIRICAL STUDY OF DOW JONES ISLAMIC MARKET (DJIM) AND NIFTY ISLAMIC MARKET (DJIM) AND NIFTY SHARIAH INDEX SHARIAH INDEX Mohammad Irfan Research Scholar Department of Management Central University Haryana, Mahendergarh, Haryana

SHARIAH INDEX

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Page 1: SHARIAH INDEX

CANONICAL INVESTMENT: AN CANONICAL INVESTMENT: AN EMPIRICAL STUDY OF DOW JONES EMPIRICAL STUDY OF DOW JONES ISLAMIC MARKET (DJIM) AND ISLAMIC MARKET (DJIM) AND NIFTY SHARIAH INDEXNIFTY SHARIAH INDEX

Mohammad IrfanResearch Scholar

Department of Management Central University Haryana, Mahendergarh, Haryana

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OBJECTIVEOBJECTIVE

The present paper is focused on examining the risk and return behaviour of the selected Shariah Nifty index & DJIM and benchmark indices (NIFTY, DJI) during the period from the date of launch of Nifty Shariah index in Indian Capital Market i.e. from 1st Jan 2007 to 31st Aug 2013.

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• To find out the impact of Nifty Shariah index by the volatility of Nifty Index.

• To find out the impact of Dow Jones Islamic Market by the volatility of Dow Jones Global Index.

• To analysis the performance of Nifty Shariah Index and Dow Jones Islamic Market.

• To do comparative analysis between Nifty Shariah Index and Dow Jones Islamic Market.

OBJECTIVEOBJECTIVE

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ISLAMIC CANONICAL LAW

Shariah is Islamic canonical law, which observant Muslims adhere to in their daily lives. Shariah has certain strictures regarding finance and commercial activities permitted for Muslims. It prescribes a set of criteria which needs to be satisfied before a Muslim investor or institution can invest in the equity of a given company. From the view point of Shariah law, businesses such as those dealing in pork, alcohol, gambling, conventional financial services, media or advertising, tobacco, pornography, music etc are non-permissible for investment. Furthermore, companies have to be screened so that they satisfy certain accounting ratio restrictions.

INTRODUCTIONINTRODUCTION

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QURAAN STATES THE BUSINESS

The Islamic economy is built upon the real economy this is where the process of production of tangible goods and services, Islam has designated a role for finance in the economy - due to Islam's focus on the real economy which is the wealth creating aspect of any economy finance in Islam is not an end in itself as there is no interest (Riba). Wealth in Islam is created through each stage of industry i.e. mining, refining, manufacturing and sales' All of this adds value at each stage and creates wealth for the economy.

اْل�َب� ْلّل"ُه اَّل$ َأ�َح� َب�اَو� ْلِّر* ْث�اَّل ااْل�َب�ْي�ُع ِم- -َّن$ِم� �ِإ اْل وا ِم�َق� َذ�ْل-َك�َب-َأ�َّن$ُه َب�ا اْلِّر* َم� ِّر$ ْي�ُع�و�َح�"That is because they say: ‘Trading is only like Riba,' whereas Allah has permitted trading and forbidden Riba." [al-Baqarah, 2:275]

Riba (Arabic word) the basis of Islamic Finance prohibits usury, termed as Riba (which is the lending of money at exorbitant rates) but it doesn’t stop just there.

INTRODUCTIONINTRODUCTION

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• SHARIAH SCREENING

• Standard & Poor’s has contracted with Ratings Intelligence Partners (RI) to provide the Shariah screens and filter the stocks based on these screens. Ratings Intelligence Partners is a London/Kuwait-based consulting company specializing in solutions for the global Islamic investment market. Its team consists of qualified Islamic researchers who work directly with a Shariah Supervisory Board. It is continually working with regional banks to create Shariah-compliant equity products and expand investment offerings. Shaiarh Screening based on:

• Sectoral Based Screening: BSE TASIS Shariah50 includes sector like Oil & Gas, FMCG, IT, Health Care, Transport Equipment, Housing Related, Telecom, Metal Mining, capital Goods, Chemical & Petrol, Consumer Durable, Diversified. All these sectors are Permissible in Shariah Law.

INTRODUCTIONINTRODUCTION

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• Financial Based Screening: Since interest-based transactions are prohibited by Shariah, companies passing the business screening stage are further screened to ensure that their dealings involving interest-based debt or earnings out of deployment of funds on interest are within the maximum tolerance limits set by Shariah scholars.

• Interest based-debt should be less than or equal to 25% of Total Assets.

• Interest income plus returns (currently considered @8%) from interest-based investments should be less than or equal to 3% of the total income.

• Receivables plus cash and bank balances should be less than or equal to 90% of Total Assets’

INTRODUCTIONINTRODUCTION

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HYPOTHESISHYPOTHESIS• Null Hypothesis

• H0 = There is no significant relationship between the performance of Nifty Shariah and Nifty Index

• H0 = There is no significant relationship between the performance of DJI and DJIM.

• H0 = There is no correlation between Nifty Shariah and Nifty Index.

• H0 = There is no correlation between DJI and DJIM.

• H0 = There is no correlation between Nifty and DJI.

• H0 = There is no correlation between Nifty Shariah and DJIM.

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DATA ANALYSIS & INTERPRETATIONDATA ANALYSIS & INTERPRETATION

MethodologyStudy the Performance of Risk and Return behavior of indices .Beta (CAPM) Capital Assets Price Model . CAGR (Compound Annual Growth Rate). Correlation. T-test, etc.

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• In this study, daily returns, without any adjustment for dividends, has computed by using this formula:

• Rt = ln(Pt / Pt – 1)* 100

• Where:

• Rt = is the daily return at time t of the Nifty Shariah Index & DJIM and Benchmark Indices(NIFTY Index & DJI).

• Pt = is the daily price in time period t.

• Pt-1 = is the daily price one period t-1.

DATA ANALYSIS & INTERPRETATIONDATA ANALYSIS & INTERPRETATION

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DATA ANALYSIS & INTERPRETATIONDATA ANALYSIS & INTERPRETATION

Compound Annual Growth Rate

= Start Value,

= Finish Value,

= Number of years.

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EMPIRICAL RESULTSEMPIRICAL RESULTS

• Risk and Return behavior of Nifty Shariah &DJIM and Nifty Index & DJIM

• This part of study narrated the risk and return behavior of DJIM on DJI and Nifty Shariah Index on Nifty Index. The daily return of Nifty Shariah Index & DJIM and Benchmark Indices (Nifty Index & DJIM) were calculated as natural logarithm of today price divide by tomorrow price.

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EMPIRICAL RESULTSEMPIRICAL RESULTSTable 1: Performance of Nifty Shariah with Nifty Index from 1st

Jan. 2007 to 31st Aug. 2013

Indices Returns Volatality CAGR (%)

Nifty Shariah 0.017 67.472 0.0826

Nifty 0.019 69.623 0.0620

The table 1 explain the respectively of Nifty Shariah is lower as compare to the volatility of Nifty, However, CAGR of Nifty Shariah is greater then the CAGR of Nifty. Hence, Nifty Shariah is less risky than Nifty. But growth of nifty shariah is increase because of Shariah law.

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EMPIRICAL RESULTSEMPIRICAL RESULTS

Table 2: Performance of DJIM with DJI from 1st Jan. 2007 to 31st Aug. 2013

The table 2 explain the respectively of DJIM is lower as compare to the volatility of DJI, However, CAGR of DJIM is Greater then the CAGR of DJI. Hence, DJIM is less risky then DJI. But growth of DJIM is increase because of Shariah law.

Indices Returns Volatality CAGR (%)

DJIM 0.009 52.25937 -0.0384

DJI 0.007 56.38084 -0.2025

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EMPIRICAL RESULTSEMPIRICAL RESULTS

Table 3: Performance of Beta Nifty Shariah over the Nifty

The table 3 described the results of the beta with respective to Nifty. The beta value of Shariah Nifty over the Nifty is more than 0.94 that means that 94% movement in Shariah is dependent on market movements and rest 6% depends on the other factors

Property Beta value

Nifty Shariah with Nifty 0.943648

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EMPIRICAL RESULTSEMPIRICAL RESULTS

Table 4: Performance of Beta DJIM over the DJI

The table 4 described the results of the beta with respective to DJI. The beta value of DJIM over the DJI is more than 0.81 that means that 81% movement in DJIM is dependent on market movements and rest 19% depends on the other factors.

Property Beta value

DJIM with DJI 0.813342

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EMPIRICAL RESULTSEMPIRICAL RESULTSTable 5: Correlation Matrix of Nifty Shariah and DJIM with Benchmark

Indices

In comparing the returns relationship of the all indices with correlation matrix, the correlation between the returns of the Nifty Shariah and benchmark index (Nifty) is positive and highly correlated. This indicates that there is a strong linear relationship between returns of the both indices in India. This relationship is very similar to the result of Ahama and Ibrahim (2002) in Malaysia and P. Natarajan and M. Dharani (2012) in India. The correlation between the returns of the DJIM and benchmark index (DJI) is positive and highly correlated. This indicates that there is a strong linear relationship between returns of the both indices in US.

Indices Nifty Shariah Nifty DJIM DJI

Nifty Shariah 1      

Nifty 0.973727741 1    

DJIM 0.007931416 0.003273039 1  

DJI -0.015665316 -0.021564327 0.877515 1

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EMPIRICAL RESULTSEMPIRICAL RESULTSTable 6: Results of the t-Test for returns of the Nifty Shariah and Nifty

From the table above, it is clear that the value of T-test is less than tabular value, hence the hypothesis is rejected.

Properties Shariah Nifty

Mean 1.069704797 1.431672251

Variance 171.6081341 160.8895775

Observations 26 26

Pooled Variance 166.2488558

Hypothesized Mean Difference 0

df 50

t Stat -0.101218959

P(T<=t) one-tail 0.459890729

t Critical one-tail 1.675905026

P(T<=t) two-tail 0.919781458

t Critical two-tail 2.008559072

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EMPIRICAL RESULTSEMPIRICAL RESULTSTable 7: Results of the t-Test for returns of the DJIM and DJI

From the table above, it is clear that the value of T-test is less than tabular value, hence the hypothesis is rejected.

Properties DJIM DJI

Mean 0.646783682 0.7833924

Variance 97.7799725 62.960954

Observations 26 26

Pooled Variance 80.37046331

Hypothesized Mean Difference 0

df 50

t Stat -0.054941653

P(T<=t) one-tail 0.47820195

t Critical one-tail 1.675905026

P(T<=t) two-tail 0.9564039

t Critical two-tail 2.008559072

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EMPIRICAL RESULTSEMPIRICAL RESULTS• Graphical Table: 1 Comparative Returns of Nifty Shariah and Nifty during the

time period of 1st Jan. 2007 to 31st Aug. 2013.

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EMPIRICAL RESULTSEMPIRICAL RESULTSGraphical Table: 2 Comparative Returns of DJIM and DJI during the time period of

1st Jan. 2007 to 31st Aug. 2013.

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CONCLUSIONCONCLUSION• The present study empirically analysed the risk and return of the Nifty Shariah

Index & DJIM and benchmark indices (Nifty & DJI) during the period from 1st

Jan 2007 to 31 Aug 2013. The closing prices of the Nifty Shariah Index & DJIM and closing value of the Nifty benchmark indices (Nifty & DJI) were collected from the NSE and Yahoo finance websites. The study employed the t-test, market model and correlation to examine the study objectives. It found that there is no difference between Nifty Shariah Index & DJIM and benchmark indices (Nifty & DJI) returns and also from among the Nifty Shariah Index & DJIM and common index in India & US (America) during the study period. Even speculation and gambling activities were prohibited in Nifty Shariah Index & DJIM, Nifty Shariah Index & DJIM provides same return as common index(Nifty & DJI) provide. In this study researcher observed there is highly positive correlation between Nifty Shariah Index and Nifty Index. Same as positive correlation between the DJIM and DJI. Hence, the study infers that the equity based Nifty Shariah Index & DJIM are the social responsible investment avenue to the investors especially to small and individual ethical investors.

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