Impact of Sharia‐Based Screening on Equity Risk: International Evidence

ABSTRACT This paper investigates the impact of mainstream Sharia‐based screening methodologies on equity risk. The study is based on the daily returns of 23 pairs of stock indices belonging to different index providers, namely Dow Jones, FTSE, and S it is, in its essence, a risk‐reduction strategy. Findings suggest that Sharia‐compliant stocks would be of great attractiveness to risk‐averse investors. They will find their claim in this asset class, as its riskiness is relatively low. For banks, a lower VaR of Islamic investing implies fewer capital requirements for market risk when holding portfolios that include Sharia‐compliant stocks. Fewer capital requirements will enhance the banks' ability to invest and make profits, which will, in turn, result in reducing the cost of capital.