Islamic economics rules and the stock market: Evidence from the United States

In the Islamic framework of stock markets there is no predetermined interest rate, excess speculative activities and asymmetric information. In these markets there are good intentions in trades and stocks are obtained not in vanities. It has been shown that debt financing and economic waste through excess speculative activities cause a reduction in stock price and returns. A model of stock price for a large country was developed and tested for the S&P 500 Index. It was found interest rate, outstanding government debt and deficits result in a reduction of stock price for the sample period of 1973 Q1 - 2011 Q4. It was also found that the excessive speculative activities during the 1871 Q1 - 2011 Q4 period resulted in bubbly stock prices in the United States and the excess speculative activities added misleading information to stock prices so that stock returns fell.