This study compares the momentum profitability of Islamic and conventional
stocks in Malaysia and examines whether the presence of momentum profits is
market-state dependent. Winner portfolios are shown to outperform loser
portfolios, suggesting that a momentum effect exists in the equity market.
Islamic stocks exhibit stronger momentum than conventional stocks.
Interestingly, although pursuing profit is not the primary goal of Islamic
stock investors, the findings indicate that momentum profits for all Islamic
stock trading strategies are higher than those for conventional stocks. The
profits from momentum strategies for both stocks are market-state dependent.
In all trading strategies, while there are significant positive momentum
profits following market upturns, there is no evidence of profits subsequent
to market downturns. Overall, Islamic stocks yield higher momentum profits
than conventional stocks across market states. These findings are robust to
using various measures of the state of the market. While the presence of
momentum profits is also robust to the inclusion of Fama-French?s (1993)
risk factors, the risk factors are unable to explain momentum profits,
suggesting that the risk-adjusted momentum profits are not due to risk
compensation. Rather, the profitability is evidence of stock mispricing.
Do momentum strategies perform better for Islamic stocks than for conventional stocks across market states?
