Title: Martingale effect of conventional vs. Islamic stock indices: evidence from the UAE

Authors: Hazem Marashdeh; Sania Ashraf

Addresses: College of Business, Abu Dhabi University, P.O. Box 59911, Abu Dhabi, UAE ' College of Business, Abu Dhabi University, P.O. Box 59911, Abu Dhabi, UAE

Abstract: This study aims to identify the martingale effect of conventional and Shariah equity markets in the United Arab Emirates. The study employs the runs test for randomness, and the Breusch-Godfrey LM test and the variance ratio test using daily returns for the period January 1, 2008 to August 31, 2017. The empirical results indicate that the UAE's conventional equity market operated efficiently, while the Shariah equity market lacked randomness during the study period. The existence of stock-market efficiency in the conventional stock price index is considered an essential factor for attracting foreign portfolio investment. Nevertheless, the inefficiency of the Shariah market offers opportunities for well-informed investors to achieve abnormal levels of returns. However, having an inefficient Islamic market index points to the need for Shariah boards to make the market more transparent and ensure information flows are instantaneous. The findings of the study have useful implications not only for investors but also for regulators and policy makers in terms of the need to reduce economic distortions through more effective resource allocation.

Keywords: martingale; heteroscedasticity; informational efficiency; variance ratio test; Breusch-Godfrey LM test; UAE.

DOI: 10.1504/AAJFA.2022.124251

Afro-Asian Journal of Finance and Accounting, 2022 Vol.12 No.3, pp.279 - 290

Received: 09 Oct 2018
Accepted: 10 Mar 2019
Published online: 20 Jul 2022 *

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