International Journal of Business and Management Invention (IJBMI) ISSN (Online): 2319 – 8028, ISSN (Print): 2319 – 801X www.ijbmi.org || Volume 8 Issue 2 Ver.II || February. 2019 || PP—22-30 www.ijbmi.org 22 | Page Performance Comparison of Islamic and Conventional Indices of Pakistan, Malaysia and Indonesia Rizwana Haroon, Dr. Bilal Aziz, Anam Batool Master of Philosophy in Accounting & Finance Lahore School of Accountancy and Finance, University of Lahore, Lahore, Pakistan Assistant Professor University of Engineering and Technology, Lahore Master of Philosophy in Accounting & Finance Lahore School of Accountancy and Finance, University of Lahore, Lahore, Pakistan Corresponding Author: Rizwana Haroon ABSTRACT: To examine whether the Islamic indices perform better than their conventional counterparts, this research aims to study the performance comparison of Islamic and conventional indices of Pakistan, Malaysia and Indonesia. In addition, this study also examines the impact of macroeconomic variables on these indices. Different risk adjusted performance measures like Sharpe ratio, Treynor ratio and Jensen's alpha were used in the study to compare the indices performance. Auto-Regressive Distributed Lag (ARDL) model was employed to see the impact of macroeconomic variables on these indices. Performance ratios results revealed that conventional indices outperformed the Islamic indices in Pakistan and Indonesia except for Malaysia where no difference was found in performance of both indices. ARDL Bound test indicated that cointegration existed between the macroeconomic variables and the stock market of all countries. KEY WORD: Islamic index, Conventional Index, Macroeconomic variables, Performance ratios, ARDL model --------------------------------------------------------------------------------------------------------------------------------------- Date of Submission: 24-01-2019 Date of acceptance: 08-02-2019 --------------------------------------------------------------------------------------------------------------------------------------- I. INTRODUCTION AND LITERATURE REVIEW Stock market has been widely used as an important barometer of a country's economic progress. To aid growth of the business sector, it specifies the accessibility to long-term funding. The stock market acts as a ground for investment which particularly plays a crucial role in the economy as a way of financing for companies and other institutions.(M.Shabri,2007). Stock market indices determine the price movements in market or of a market section. Stocks under Islamic laws, i.e. Shariah, has shaped world financial system in less than two decades in response to a strong demand from Muslim community worldwide to have an alternative financial system that is much more invulnerable to moral hazard. Islamic finance differs from the conventional one by their distinctive features which are Shariah compliant. In last few years, it has achieved a rapid growth (Ahmed et al, 2002). The main difference between these two investments is that the Islamic investment do not conflict with the Islamic principles. It is based on these main principles Islamic forbidding speculation (maysir), interest, excessive uncertainty, investing in ‘unethical’ industries and sharing of risk and return (Zahari et al, 2009). Islamic index follow Shariah principles. They are passed through different screening criteria of liquidity and financial ratios (Hakim and Rashidian,2002). Undoubtedly, the conventional indices have proved to lead an exceptional role in the economic development and their history as compared to the Islamic Indices is much longer but due to the problems frequently occurring with the composite financial system, like mortgage crisis (subprime) financial crisis (2007), investors have become more conscious. Shocks related to these crisis proved to be less severe for the Islamic financial system. For this reason, Islamic finance was given great attention in the recent decades (Chaffai,2016). With the increasing growth in Islamic finance, Islamic equity funds traded in Islamic equity markets were launched in the early 1990's. Unlike conventional stock market, Islamic stock market is where the Shariah compliant stocks are traded. Islamic finance has increased opportunities specially for the investors who are sensitive to religious beliefs. Islamic financial investments has contributed in the growth of Islamic finance. Investors have started to believe it as the alternative way of hedging. For the trading of Islamic funds these indices are quite new compared to their counterparts (Ali and Mehmet,2015).There are several other factors which effects the performance of equity markets. Equity market is much volatile and is affected by different factors like