The Size Anomaly in Islamic Stock Indices: A Stochastic Dominance Approach

This paper examines whether small Islamic firms' returns stochastically dominate (outperform) the returns of large Islamic firms using Ascending and Descending Stochastic Dominance (ASD and DSD) approaches. In other words, we investigate the size anomaly in Islamic equity indices. We use global, European, Asian/Pacific, and US Islamic equity indices from 1996 to 2019. For risk-averse investors, we find that small-size portfolios of Islamic indices ASD outperform large-sized portfolios in Asia/Pacific and Europe, while the opposite is true in the Dow Jones and the US. For risk-seeking investors, we find that small-sized portfolios of Islamic indices DSD outperform large-sized portfolios in the Dow Jones and the US, while the opposite is true in Asia/Pacific and Europe. We conclude that a size anomaly is present, and Islamic stock indices are inefficient in the semi-strong form. The results of this study should assist those who are interested in investing in Islamic equity markets in building their investment portfolios.