Debt externality in equity markets: Leveraged portfolios and Islamic indices

This paper tests for the externality of debt in the equity markets. Adopting an exogenous view of the business cycles and assuming myopia amongst borrowers and lenders, the paper argues that when the markets are going up, portfolios and indices with high debt should perform better than those with low debt, while during the downward phase, low debt portfolios and indices would perform better. We use firm as well as index level data to compare...