Syariah and Conventional Stocks: A Comparative Study Using Stochastic Dominance


  • Agus Saur Utomo Universitas Muhammadiyah Purworejo
  • Mamduh Mahmadah Hanafi Universitas Gadjah Mada

DOI: 10.14456/abacj.2022.1
Published: 2022-04-30


This study compares the performance of Syariah stocks to that of Conventional stocks in the non-crisis, crisis, and overall periods, using the Stochastic Dominance approach of Davidson and Duclos (2000). A sample of Indonesian stocks from Daftar Efek Syariah (DES) and Malaysian stocks from Senarai Sekuriti Patuh Syariah (SSPS) were screened to obtain pure Syariah stocks. The study covers a 10-year-period for Indonesia and a 12-year-period for Malaysia. The study found that Indonesia’s Syariah stocks stochastically dominate Indonesia’s Conventional stocks in overall and non-crisis periods. However, during the crisis period, the performance of Indonesia’s Syariah stocks decreased so that the performance of Syariah stocks was equal to that of Indonesia’s Conventional stocks. In this period, the return of Indonesia’s Syariah stocks decreased significantly. For Malaysia, it was found that the performance of Malaysia’s Syariah stocks was equal to that of Malaysia’s Conventional stocks in the overall period. However, in the global crisis period, Malaysia’s Syariah stocks stochastically dominated that of Malaysia’s Conventional stocks. The results of this study have implications for investors in general and Syariah investors in particular. Investing in Syariah stocks maintains two objectives: compliance to Syariah and earning a competitive return. Investors, in general, can also diversify their portfolios better and increase their expected wealth and/or expected utilities.


Aarif, M.B.H., Rafiq, M.R.I. and Wahid, A.N.M., 2021, Do ‘Shariah’ indices surpass conventional indices? A study on Dhaka Stock Exchange, International Journal of Islamic and Middle Eastern Finance and Management,14, 94-113.

Abdullah, F., Hassan, T. and Mohamed, S., 2007, Investigation of performance of Malaysian Islamic unit fund trusts, comparison with conventional unit trust fund, Managerial Finance, 33, 142–153.

Al-Khazali, O., Lean, H.H. and Samet, A., 2014, Do Islamic stock indexes outperform conventional stock indexes? A stochastic dominance approach, Pacific-Basin Finance Journal, 28, 29-46.

Anderson, G.,1996, Nonparamtrric test of stochastic dominance in income distribution, Econometrica, 64,1183-1193.

Ashraf, D. and Muhammad, N., 2014, Matching perception with the reality- Performance of Islamic equity investments, Pacific-Basin Finance Journal, 28, 175–189.

Bai, Z., Li, H., Liu, H., Wong, M.K., 2012, Test statistic for Prospect and Markowitz Stochastic Dominance with Applications, Econometric Journal, 14 (2), 278-303.

Barrett, G.F., and Donald, S.G., 2003, Consistent tests for stochastic dominance, Econometrica, 71, 71-104.

Bishop, J.A., Formly, J.P. and Thistle, P.D., 1992, Convergence of the South and Non-South income distributions, American Economic Review, 82, 262–272.

Boo, Y.L., Ee, M.S., Li, B. and Rashid, M., 2016, Islamic or conventional mutual funds: Who has the upper hand? Evidence from Malaysia, Pacific-Basin Finance Journal, 42, 183-192.

Davidson, R. and Duclos, J.V., 2000, Statistical inference for stochastic dominance and for the measurement of poverty and inequality, Econometrica, 68, 1435-1464.

Elfakhani, S., Hassan, K. and Sidani, Y., 2005, Comparative performance of Islamic versus secular mutual funds, 12th Economic Research Forum Conference in Cairo, Egypt.

Elton., E.J., Gruber, M.J., Brown, S.J. and Goetzmann, W.N., 2014, Modern Portfolio Theory and Investment Analysis, John Wiley and Sons.

Fama, E.F. and French, K.R., 1992, The Cross Section of Expected Stock Returns, The Journal of Finance, 47, 427-465.

Falk, H. and Levy, H., 1989, Market reaction to quarterly earning’s announcement: a stochastic dominance-based test of market efficiency, Management Science, 35, 425-446.

Hadar, J. and Russell, W.R., 1969, Rules for ordering uncertain prospects, American Economic Review, 49, 25-34.

Hanoch, G. and Levy, H., 1969, The efficiency analysis of choices involving risk, Review of Economic Studies, 36, 335–346.

Hassan, M.K. and Girard, E., 2011, Faith-based ethical investing: The case of dow jones Islamic indexes, Islamic Economic Studies, 17, 1-31.

Ho, C.S.F., Rahman, N.A.A., Yusuf, N.H.M. and Zamzamin, Z., 2014, Performance of global Islamic versus conventional share indices: International evidence, Pacific-Basin Finance Journal, 28, 110-121.

Ho, C.S.F. and Mohd-Raff, N.E.N., 2019, External and internal determinants of performances of Shariah and non-Shariah compliant firms, International Journal of Islamic and Middle Eastern Finance and Management, 12, 236-253.

Jarrow, R.,1986, The relationship between arbitrage and first order stochastic dominance, Journal of Finance, 41,915-921.

Kaur, A., Rao, B.L., Singh, H., 1994, Testing for second-order stochastic dominance of two distribution, Econometric Theory, 10, 849-866

Lean, H.H., Wong, W.K., & Zhang, X. ,2008, The sizes and powers of some stochastic dominance tests: A Monte Carlo study for correlated and heteroskedastic distributions, Math. Comput. Simul., 79, 30-48.

Lean, H.H., Lien, D. and Wong, W.K., 2010, Futures versus stocks: a stochastic dominance study in Malaysian markets, Advance in Investment Analysis and Portfolio Management., 4, 49–80.

Levy, H., 1992, Stochastic Dominance and Expected Utility: Survey and analysis, Management Sciences, 38,555-593.

Linton, O., Maasoumi, E., Whang, Y.J., 2005, Consistent testing for stochastic dominance under general sampling schemes, Review of Economic Studies, 72, 735-765.

McFadden, D.,1989, Testing for Stochastic Dominance. In: Fomby, T., (Eds.), Studies in the Economics of Uncertainty, Springer Verlag, New York, 113-132.

McGowan, C. and Junaina, M., 2010, The theoretical impact of the listing of Syariah approved stocks on stock price and trading volume, International Business & Economics Research Journal, 9(3), 11-19.

Mwamba, J.W.M., Hammoudeh, S. and Gupta, R., 2016, Financial tail risks in conventional and Islamic stock market: A comparative analysis, Pacific-Basin Finance Journal, 42, 60-82.

Temper, J., 1991, The cost of social criteria, Pensions and Investment, May 13, 34.

Sauer, D.A., 1997, The Impact of social responsibility screens of investment performance: evidence from domini 400 social index and domini equity mutual fund, Review Finance Economic, 6, 137-149.

Schmid, F. and Trede, M., 1998, A kolmogorov-type test for second-order stochastic dominance, Statistic and Probability Letters, 37, 183-193.

Stoline, M.R. and Ury, H.K., 1979, Tables of the studentized maximum modulus distribution and application to multiple comparisons among means, Technometrics, 21, 87-93.

Strong, R.A., 2003, Portfolio Construction, Management and Protection, Thomson South-Western, 3ed.

Temper, J., 1991, The cost of social criteria, Pensions and Investment, May 13, 34.

Tse, Y.K. and Zhang, X., 2004, A Monte Carlo investigation of some tests for stochastic dominance, Journal of Statistical Computation and Simulation, 74, 361–378.

Whitmore, G.A., 1970, Third-Degree Stochastic Dominance, American Economic Review, 60, 457-459.

Wong, W.K., Phoon, K.F. and Lean, H.H., 2008, Stochastic dominance analysis of Asian hedge funds, Pacific-Basin Finance Journal, 16, 204–223