Risk and returns of Sharīah compliant stocks on the Karachi stock exchange - A CAPM and SCAPM approach

This study documents the asset pricing mechanism of Sharīah compliant securities listed on the the Karachi Stock Exchange. We select the CAPM market model to test for the impact in variations of stock returns on a sample of Sharīah-compliant companies on ten years monthly data (2001-10). We first test the basic CAPM (Capital Asset Pricing Model) and its modified form known as the Sharīah-compliant asset pricing model (SCAPM). We also analyse return differences due to size (market capitalization), book to market (B/M) value, price-earning ratio (PER), and cash-flow yield (CFY). Our results find a strong impact of the market index on stock returns (adj-R2 70%) and confirm the anomalies of size, B/M, CFY, and PER, while SCAPM is slightly better in explaining variations in cross-sectional stock returns.