Idiosyncratic momentum anomaly and Shari’ah compliant stocks: A study on how firm-specific return patterns drives future returns in the US financial markets

Abstract

This study investigates the existence of idiosyncratic momentum (IMOM) profit in Shari’ah compliant stocks. The sample data includes all the common shares listed on the US equity markets from 1986 to 2020. This study used the GRS, Fama-MacBeth (1973) and factor-spanning tests employing the prominent asset pricing factor models. The empirical finding supports the existence of IMOM profit in Shari’ah compliant stocks for the US equity market. Further, these findings show that idiosyncratic momentum (IMOM) is a separate factor that expands the efficient frontier. Additionally, Fama MacBeth regressions results indicate that on a stand-alone basis, when both characteristics (IMOM and MOM) variables are included at the same time to the recent factor model, IMOM variable emerges stronger than the MOM. Our robustness analysis indicates IMOM returns are not sensitive to seasonal patterns (i.e., January effect) and IMOM returns remain persistent across the year. Therefore, this investment strategy offers higher profitability, less transaction costs and is more practically implementable.