Investors from different religious and cultural backgrounds may exhibit varied investment behaviours. The fundamental asset pricing theory does not account for religious beliefs and assumes rational expectations in investment. Hence, the effects of various psychological and religious factors on investment and asset valuation are overlooked. This study attempts to fill this gap by empirically investigating the relationship between religious belief and pricing behaviour in Shariah-compliant stocks at a global level. This study aims to investigate herding behaviour in the most influential Islamic economies, which together represent nearly 70% of the global Islamic economy.
The CSADt developed by Christie and Huang (1995) and Chang et al. (2000) is used to assess market consensus, and several regression models are used to explore its relationship with global market returns. Dummy variables for extreme up and down markets, and their interactions with global market returns, are incorporated into different regression models to test for herding.
A significant positive relationship between global market returns and cross-sectional return dispersion suggests that investors generally act independently across Shariah-compliant markets. However, herding behaviour emerges under specific conditions. During strong up-market phases, Türkiye, Dubai, Malaysia, Pakistan and Saudi Arabia exhibit signs of herding, whereas Bangladesh and Indonesia do not. In contrast, sharp global downturns trigger herding in Türkiye, United Arab Emirates, Nigeria, Malaysia, Indonesia and Saudi Arabia, with Bangladesh and Pakistan remaining unaffected. These findings underscore the country-specific and condition-dependent nature of herding in Shariah-compliant markets, shaped significantly by the direction and intensity of global market trends.
The findings of this study offer valuable insights for multiple stakeholders. Policymakers can use evidence on divergent herding behaviours across economies to design context-specific regulations that promote market stability, especially during extreme market phases. Investors may benefit by becoming more aware of their behavioural biases and adopting strategies, such as hedging, to mitigate exposure to global uncertainties. Portfolio managers can leverage these insights to better understand investor reactions and adjust their strategies accordingly. In addition, regulators can strengthen governance and ensure timely disclosure of information to reduce information asymmetry and discourage herd-driven decision-making, thereby promoting more efficient, fundamentals-driven markets.
This study is significant because the understanding of how religious sentiments influence investor behaviour is limited. Specifically, empirical research examining asset pricing behaviour in Shariah-compliant stocks at a global level. This paper represents a pioneering attempt to study the performance of Shariah-compliant indices from the Top 8 Organisation of Islamic Cooperation (OIC) economies, which together account for nearly 70% of OIC member states’ total gross domestic product, and is an important milestone in behavioural finance literature to incorporate religious beliefs in investment decisions.
