Islamic spot and index futures markets: Where is the price discovery?

This paper examines the source of price discovery for Islamic stocks. We pair a large number of Islamic stocks to country-specific index futures and estimate price discovery using a vector error correction model. The results obtained using data for 19 countries suggest that for most countries (63% of the sample) price discovery is dominated by the spot market. We show that for these countries, a mean-variance investor makes annualized average profit of 4.91% compared to an average buy-and-hold profit of 2.97% per annum.