Higher Order Moments Timing Abilities of Islamic Fund Managers

Abstract

This study scrutinises the performance of Shariah compliant funds in Saudi Arabia, Pakistan, and Malaysia based on fund managers' market and higher-order moments timing abilities from Jan 2010 to June 2022. The study explicitly introduces higher-order moments as a potential risk factor, which is reflected in the specification of the study model and also represents the non-normality distribution of the market's return. On average, the Islamic funds produced positive alpha compared to conventional funds in all selected Islamic countries after incorporating the higher-order moment's factor in the famous four-factor model. The study offers novel findings that Islamic fund managers have better market timing abilities than conventional fund managers. Additionally, the higher-order moments timing abilities are also better for Islamic funds than conventional funds. These results conclude that Islamic fund managers have superior timing abilities and could generate higher returns for their investors than conventional funds. The study found that both types of funds preferred positive skewness. Thus, they pay overpriced hedges against negative skewness securities to avoid the skewness risk. In negative risk, the premium is associated with higher-order moments risk in Islamic and conventional funds.

Keywords: Islamic Funds, Conventional Funds, Timing Abilities, Higher-Order Moments, Islamic Countries, Performance