Momentum returns, market states, and market dynamics: Are Islamic stocks different?

Abstract

Recent studies suggest that momentum returns are conditioned by market states and market dynamics. We ask if Islamic stocks behave differently from Non-Islamic stocks. Using data from the Malaysian stock market from 1991 to 2015, we find no significant difference in Islamic versus Non-Islamic stocks either in their level of momentum returns or in the behaviour of momentum returns in response to market states and market dynamics, irrespective of whether we use time-series or cross-sectional momentum returns. Interestingly, we find that the behaviour of momentum returns in Malaysia is broadly consistent with that in the US market in that momentum returns are higher following UP markets compared with momentum returns following DOWN markets. We also find that momentum returns are larger when the market continues in same state than when it transitions to a different state, consistent with results in the US market and that the absence of momentum returns following DOWN market states is due to market dynamics. Our results suggest that investors in Islamic stocks can execute momentum strategies without loss of efficacy compared with Non-Islamic stocks.