Is Shari’ah Index Membership Risky? The Case of Malaysia Shari’ah Blue-Chip Index

The study explores the Shariah index membership effect around the index revision period, especially for the newly added and deleted constituent stocks (termed as event stocks). This study analysed 40 event stocks for the Shariah blue-chip index, Dow Jones Islamic Market Titans Malaysia 25 Index (DJIMY25). The analysis was conducted over a period of seven years (2009-2015) using event study methodologies, which capture abnormal returns, trading volumes, and return volatility, and discussed the extent of market efficiency. The study divided the event stocks into three groups – additions, deletions due to the index annual rebalancing, and deletions due to non-Shariah compliance. The findings of this study provide new evidence on index additions and deletions contrary to the ones reported in previous studies. Surprisingly, additions to DJIMY25 produce negative results with a permanent decrease in stock returns and a temporary decrease in trading volumes. The deletions, either due to the index annual rebalancing or non-Shariah compliance, have shown negative results with a decrease in stock price, a temporary decrease in trading volumes, and an increase in the stock’s absolute volatility. The findings of this study imply that index membership in the Shariah index can induce Shariah-compliant risk for the firms that are unable to maintain their Shariah-compliant status in the long term.