Abstract
This paper extends the recent work of Mansor et al. [1] who use panel regression to measure ethics based Islamic mutual fund performance and note the various methodological issues in this respect. We attempt to capture the co-movement and dependence structure of the fund index with five major equity indices before and during the Global financial crises (GFC). Four models—CAPM, normal Copula, symmetrised Joe-Clayton Copula and Rotated Gumbel Copula—are used to analyse the co-movement and dependence structure of Islamic investment funds. Our findings show that the ethical investment funds have low dependence with the major market indices. The fluctuations in the financial markets in the U.S., the U.K., Germany and Japan are less likely to affect the Islamic investment funds than other financial assets. However, the time-varying dependence increases dramatically during the GFC indicating that the diversification merits of Islamic equity funds in the portfolio deteriorate in the bear market. Some of the empirical results drawn in this paper will raise awareness among both academicians and financiers about the importance of Islamic investment funds during and out of crises periods.
Highlights
The last three decades have seen tremendous interest and growth in the field of ethical investment
Islamic investment fund (IMF) or Islamic Mutual fund may be more concerned with a very different set of ethical criteria from Western “green” or ethical investors, but the issues of business ethics, stock selection and screening technique are of common interest to general ethical investment and the IMF which is based on interest free settings due to religious ethics, as interest is prohibited in Islamic banking and finance (IBF) products, including IMF
We examine the interaction between the Europe Open-end Islamic Shari’ah Equity fund and the five major stock indices
Summary
The last three decades have seen tremendous interest and growth in the field of ethical investment. Hoepner et al [18] analyse the financial performance and investment style in IMFs employing a bigger sample including 265 IEFs from 20 countries They find that the performance of IMFs from countries with more developed Islamic financial markets is comparable to international equity benchmarks, while funds from countries with less Islamic assets, especially Western nations, tend to significantly underperform. Our study contributes to the literature by providing empirical evidence of the co-movement and dependence structure of Islamic investment funds with the Islamic and the Western stock indices employing both the linear (CAPM) and non-linear (Copula) methods.
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