Islamic Equity Indices Research Articles

Effect of Crude Oil Spot and Futures Price Volatility on South East Asia Islamic Equity Market

This paper examines the effect of crude oil price volatility on Southeast Asia Islamic equity market index. The paper focuses on the long run and short run effect of both the spot and futures price of crude oil on the Islamic equity market index in south East Asia. Daily data from September 2007 to June 2015 obtained from Bloomberg database is used in the paper. The analysis based on time series techniques within the co-integrating framework. The vector error correction model is used in this study complimented with Impulse Response Factor IRF to examine out of sample causality. The major finding of this study is that crude oil spot and futures prices have positive impact on the Islamic equity index in Malaysia, Singapore and Thailand. Though based on the short run relationship, there is remarkable difference in the speed of adjustment back to equilibrium among the Southeast Asia Islamic equity indices. Given the ongoing price volatility of crude oil prices and the market expectation that it may not abate anytime soon, this paper promotes the viability of the Southeast Asia Islamic equity market as investment safe haven to mitigate the impact of such volatility in crude oil prices.

Analysing dynamic linkages and hedging strategies between Islamic and conventional sector equity indexes

ABSTRACTThis study analyses the dynamic spillovers across 10 Dow Jones Islamic and conventional sector index pairs. Using various multivariate GARCH models, the results show significant time-varying conditional correlations for all the pairs. Moreover, there is evidence that the conditional correlations for all the sector pairs, except those of the Telecommunication and Utilities sectors, increase after the onset of the global financial crisis (GFC), suggesting non-subsiding risks, contagion effects and gradual greater financial linkages. The Islamic sectors’ risk exposure can be effectively hedged over time in diversified portfolios containing conventional sector stocks. These results provide several practical implications for portfolio managers and policymakers in regard to optimal asset allocations, portfolio risk management and the diversification benefits among these markets.

Impact of ethical screening on risk and returns

Purpose This paper aims to expand the literature on performance and volatility of Islamic funds and indices in comparison to their conventional unscreened counterparts, by studying the Moroccan case considering the recent introduction of Islamic finance in the country toward the end of 2015. Design/methodology/approach As there are still no Shariah-compliant indices in Morocco, the authors first applied four Shariah screening methodologies of some of the world leading equity index providers (i.e. Dow Jones, FTSE, S&P and MSCI) to screen the public listed companies in Casablanca Stock Exchange for Shariah compliance. Next, the authors constructed four Islamic float-weighted indexes for which they modeled the dynamic volatility using an extension of the AutoRegressive Conditional Heteroskedasticity models, namely, EGARCH(1,1). Findings The findings show that the screening process resulted in a well-diversified universe of Shariah-compliant stocks (25.6 per cent) to invest in. Furthermore, it is found that constructed Islamic indices outperformed the broad-based Moroccan All Shares Index (MASI) during the considered period of analysis (January 2013 to December 2014), and their long-run volatility is higher. This indicates that investors in Shariah-compliant stocks do not sacrifice financial performance for their risky investment. The estimates of the model show that volatility for the MASI is more persistent and takes longer time to die, and the leverage effect is positive for all indices, meaning that volatility of indexes’ returns is influenced more by good news than bad news, a result that is in contrast to other studies for developed countries. Practical implications On the arrival of the new banking law that introduced Islamic finance for the first time in Morocco, the authors suppose that these results could be very helpful for the Moroccan financial authorities in consideration with the construction of Islamic equity indices for Muslim investors seeking to invest ethically in accordance to their religious convictions but also for index funds managers and other equity market players. Originality/value The present study is the first of its kind in Morocco to construct Islamic indices using Shariah screening methodologies for which the volatility is modeled using an EGARCH(1,1) dynamic volatility model.

On the dynamic links between commodities and Islamic equity

This paper investigates whether commodities offer potential diversification benefits for Islamic equity index investors in light of possible financialization of commodity markets. Using MGARCH-DCC and Wavelet Coherence analyses, our findings reveal that correlations between commodity markets and the Dow Jones Islamic Market World Index are time-varying and highly volatile throughout the January 1999–April 2015 period. A substantial and persistent increase was observed in the return correlations between commodities and Islamic equity at the onset of the 2008 financial crisis. However, trends in the recent two years suggest that this association is heading towards its pre-crisis levels, offering again diversification benefits for Islamic equity holders. These benefits vary across different commodities in various time scales. Overall, gold, natural gas, soft commodities, grains and livestock are better portfolio diversifiers than oil and other metals. Relative to medium-to-long term investors, short-term investors (less than 32days horizon) gained better diversification benefits in most commodities during bullish, bearish and market recovery periods. These findings have implications for investors who are heterogeneous in risk tolerance and time preference as well as for policymakers who are concerned with market stability.

Islamic financial markets and global crises: Contagion or decoupling?

This paper investigates the contagion effects of the global financial crisis (GFC) and Eurozone sovereign debt crisis (ESDC) on Islamic equity and bond markets. Using a sample of Islamic stock indices from various developed and emerging markets and the global Islamic stock and bond (sukuk) indices, we explore asymmetric conditional correlation dynamics across stable and crisis periods and across the two crises. The results fail to provide strong contagion evidence between conventional and Islamic equity and bond indices, supporting the decoupling hypothesis of the Islamic securities. Our findings imply that Islamic equities and bonds may provide a cushion against risk and instability, particularly in periods of turmoil. The small number of contagion cases mostly relates to the ESDC and developed Islamic stock indices. The findings also show that the Islamic emerging stock indices in the BRICS provide the most effective international portfolio diversification benefits compared to the Islamic developed indices.

Advanced risk profile analysis of Islamic equity investment: evidence from the American, Asian and European markets

As far as asset and liability management is concerned, the advanced analysis of the risk and return profile of Islamic financing and investment products today constitutes one of the greatest challenges for Islamic financial institutions. Given the fact that, by design, Islamic financial institutions should be keeping a handsome portion of their assets in equity investments, this paper brings out the dynamics of a specific risk profile inherent in Islamic equity investment based on investing in the sharia-compliant stock market. Therefore, we investigate three Islamic equity indexes, classified by economic hubs (Dow Jones Europe, Asia/Pacific and United States), against their conventional peers from 2003 to 2009. Our risk profile analysis is based on the estimation of two well-known advanced risk measures, namely value-at-risk (VaR) and expected shortfall (ES). Four VaR methodologies are used: historical VaR, RiskMetrics, generalized autoregressive conditional heteroscedasticity conditional VaR models and the Cornish-Fisher VaR model. The models' assessments, based on the Kupiec (1995) test, allow us to better investigate the equity indexes' daily returns tails through the estimation of the generalized Pareto distribution VaR and ES measures. The end result of our advanced risk profile analysis is that Islamic equity indexes seem to depict a regional, as well as a periodic, character risk profile. Drawing from the specific features of the Dow Jones Islamic indexes and their compounds' inherent features, this paper argues that sharia screening, which alters the composition of Islamic indexes, contributes to the shaping of a distinguished risk profile.

The market timing ability and return performance of Islamic equities: An empirical study

This study investigates the determinants of return performance of Islamic equity indices (IEIs). Empirical evidence suggests that the selection of securities and rebalancing of funds to comply with Islamic screening standards may result in superior returns for the investing public. We employ an extended four factor dynamic condition correlation GARCH model to a sample of IEIs from different regions for the period 2002–2013. The empirical results indicate a statistically significant difference between IEIs from developed markets and those from emerging markets during the sample period. Findings suggest that Shari'ah screening helps IEIs to select securities of firms that are not financially distressed, are growth oriented and are exhibiting a positive momentum. We further investigated whether Shari'ah-based screening provides any superior market timing ability over conventional benchmark indices using both parametric and non-parametric approaches. Market timing results showed that the majority of IEIs have negative market timing ability reflecting the conservative nature of Islamic equity investments whereby Shari'ah discourages investment in equities of highly leveraged corporations.

Cross-sectoral interactions in Islamic equity markets

Although it is essential for investors who want to comply with their religious obligations, cross-sectoral interaction in Islamic equity markets is an untouched subject in finance literature. Accordingly, this paper aims to investigate the interactions between the ten major sectors of Islamic equity markets by implementing the novel methodologies of dynamic conditional correlation (DCC) and dynamic equicorrelation (DECO) on Dow Jones Islamic Market sector indexes. We show that prior to the financialization period, firm fundamentals and real economic factors had an important role in driving the Islamic equity prices, however this role seemed to weaken in the last decade with the global financialization, leading to highly integrated Islamic equity sectors just as in the case of the conventional financial sectors. Moreover, this effect is emphasized further through financial contagion channels in the recent global financial crisis. Our findings thus suggest that Islamic equity indexes are also prone to global shocks hitting the world financial system, and investors should be cautious in interpreting and forecasting the interaction structure between Islamic equity sectors. Furthermore, our results do not support the decoupling hypothesis of the Islamic equity markets from the conventional financial system.

Risk-return characteristics of Islamic equity indices: Multi-timescales analysis

This paper is motivated by the heightened interest in investing in Islamic equities. The paper is the first attempt at analysing the risk-return characteristics of Islamic indices at different timescales by applying a relatively new approach in finance known as wavelet analysis. We analyze the Dow Jones indices of 11 countries, mostly emerging markets, and 10 global sectors between 2008 and 2012. We focus on exploring the multi-horizon nature of systemic risk (market beta), average return, volatility, and correlation.We find that the differences in betas between Islamic and conventional indices at most of the timescales are not statistically significant. A few exceptions show equal returns with lower risks for Islamic indices mostly at higher time scales (longer horizons) in some countries as well as 6 out of 10 sectors. We also find lower correlations for some Islamic sector-pairs (financials, utilities and consumer services) at lower time scales (shorter horizons).

Does Shari’ah Screening Cause Abnormal Returns? Empirical Evidence from Islamic Equity Indices

Islamic equity funds are subject to the screening criteria for stock selection imposed by the principles of Islamic jurisprudence (Shari’ah). Equities must pass three basic screens: revenue source, business activity, and financial factors to be included in an Islamic fund. However, screening criteria are not universal especially for the financial factors. One can use financial ratios based on either the book-value of total assets or the market-value of equity for screening of stocks. This may not only result in a different portfolio composition but also entail diverse rebalancing and monitoring costs. The performance of 29 Islamic equity indices (IEIs) versus conventional indices from four major international index providers using different Shari’ah screening criteria are analyzed in a single as well as in a multi-equation framework. The use of a multi-equation framework has the added advantage of utilizing the information content of different screening criteria adopted by different index providers. The empirical findings suggest that the difference in screening criteria does not significantly affect the performance of IEIs. Returns deviation, if any, stems from the relative riskiness of the IEI as compared with the relevant benchmark. Work needs to done to streamline the quantitative screening criteria to avoid confusion among the investing public.

Dynamic dependence of the global Islamic equity index with global conventional equity market indices and risk factors

Past studies have shown considerable differences between equity markets in conventional and Islamic financial systems, in terms of financial products and principles. Using a copula approach, this study shows that the global Islamic equity market index (represented by the Dow Jones Islamic Market Index) exhibits significant dependence with three major global conventional equity indices (Asia, Europe, and United States) and the global factors (oil prices, stock market implied volatility (VIX), the U.S. 10-year Treasury bond interest rate, and the 10-year European Monetary Union government bond index) which are common to the world financial system and pertinent to contagion risks in the case of financial crises. Moreover, this dependence varies over time for all cases except the S&P 500 index and is also asymmetric between bear and bull markets in some cases. Our findings thus suggest that the Sharia-compliance rules are not restrictive enough to make the global Islamic equity market index very different from the conventional indices. In addition, the decoupling hypothesis of the Islamic equity universe from the conventional financial system is not well supported by our empirical evidence.

Islamic equity market integration and volatility spillover between emerging and US stock markets

The purpose of this paper is to study the conditional correlations across the US market and a sample of five Islamic emerging markets, namely Turkey, Indonesia, Pakistan, Qatar, and Malaysia. The empirical design uses MSCI (Morgan Stanley Capital International) Islamic equity index since it applies stringent restrictions to include companies. Indeed, two main restrictions must be met: (i) the business activity must be compliant with Shari’ah (i.e., Islamic law) guidelines and (ii) interest-bearing investments and leverage ratios should not exceed upper limits. Three models are used: multivariate GARCH BEKK, CCC, and DCC. The estimation results of the three models show that the US and Islamic emerging equity markets are weakly correlated over time. No sheer evidence supports that the US market spills over into the Islamic emerging equity markets. Besides interpreting the results in terms of weak market integration, the peculiar specificities of the Islamic finance industry and the admittance conditions to the MSCI Islamic equity index contribute to explaining them. Indeed, Islamic finance bans interest-bearing investments and imposes some rules, such as asset-backing, which has sizeable impacts on volatility spillover and shocks transmissions, alongside with the close linkage between real and financial sectors. These findings suggest that investors should take caution when investing in the Islamic emerging equity markets and diversifying their portfolios in order to minimize risk.

Does investor sentiment impact the returns and volatility of Islamic equities?

In this paper, we estimate generalized autoregressive conditional heteroskedasticity (GARCH) and vector autoregressive (VAR) models to examine whether investor sentiment impacts the returns and volatility of various U.S. Dow Jones Islamic equity indices. The results from GARCH estimations show that changes in investor sentiment are positively correlated with the returns of the Shari’ah-compliant market portfolio. In addition, we find similar results for the three Shari’ah-compliant firm-size portfolios (i.e., large-, medium-, and small-cap). However, this relationship is stronger for harder to arbitrage Shari’ah-compliant stocks; that is, investor sentiment has a greater influence on small-cap equities. Additionally, estimations from the vector autoregressive model confirm the aforementioned results. In terms of volatility, GARCH estimations suggest that bullish shifts in investor sentiment in the current period are accompanied by lower conditional volatility in the ensuing period. In general, our findings suggest that as noise traders create more risk the market seems to reward them with higher expected returns.

Are Dow Jones Islamic equity indices exposed to interest rate risk?

The Dow Jones Islamic Market indices (DJIMI) are constructed by screening out stocks that are incompatible with Islam's prohibition of interest and certain lines of business. However, as a blunt instrument, the interest rate can affect discounted cash flows of any firm, even a firm with no financial leverage. This study reveals that the aggregate portfolio of Islamic stocks is immune to interest rate risk. However, at the sectoral level some Islamic equity portfolios demonstrate exposure to interest rate risk. Overall, evidence of interest rate risk exposure is less pronounced among Islamic sector portfolios than that of their mainstream counterparts—the Dow Jones World sector indices. The results also hold when interest rate risk is assessed in terms of the sensitivity of the DJIMI return to changes in level, slope and curvature of the interest rate term structure.

An Islamic Equity Premium Puzzle

Analysing the financial performance of Islamic equity indices from all relevant providers, we document these indices to outperform their conventional benchmarks on a global and developed market level after controlling for investment styles and a potential back-testing bias. To explain this outperformance puzzle, we investigate fundamental (ie risk factors), behavioural (ie Ramadan) and research design (ie sample length) related explanations but the overall results persist. When eliminating the effect of the financial services industry from conventional benchmarks, however, the outperformance of all indices except the Dow Jones Islamic Market (DJIM) world index disappears. This implies that Islamic equity indices have outperformed due to their critical position towards risk-free interest and the financial services industry. We conclude that they represent a viable alternative for risk-averse passive investors, especially during periods of high uncertainty around financial services and that further research is needed to fully understand the performance of the DJIM.

Matching perception with the reality—Performance of Islamic equity investments

The systematic failure of the global equity markets during the recent financial crisis made investors re-evaluate their portfolio constituents. It is argued that equities that comply with the Islamic investment principles perform better than conventional equities during the declining phase of capital markets. The better performance of Islamic investments can be attributed to the Shari'ah based screening criteria that specifically forbids investment in shares of those companies that are excessively leveraged and/or engaged in lending activities. This study investigates the extent to which this claim is valid by comparing the performance of global and regional Islamic equity indices (IEIs) with conventional equity indices during the past decade. The equity indices for such analysis are preferred since it does not account for transaction costs or management skills. A logistic smooth transition autoregressive (LSTAR) model is used to investigate whether the ‘down market’ performance of IEIs differs from conventional indices. The LSTAR is superior to conventional ordinary least squares models since this allows for a smooth transition from the ‘down market’ to the ‘up market’ rather than an abrupt change. The empirical results indicate that IEIs, in general, perform better than conventional indices during the period 2000 to 2012. We do not find any abnormal returns associated with Islamic equity indices on a global basis, however, there is evidence of positive abnormal returns in the case of regional indices from Europe and Asia. Overall, IEIs exhibit lower systematic risk as compared with their benchmark suggesting that any excess performance from Islamic investments stems from the systematic risk that each investment assumes with respect to their benchmark during the declining phase of capital markets. The findings of this study are of interest to both academics and the general investing public since it provides evidence that IEIs are comparatively less risky than their conventional counterpart and thus provide hedging opportunities during the downfall of capital markets.

Is Islamic Equity Index an Investment Heaven ? : A Comparative Study between SHA 50 and Nifty 50 of India

Bombay Stock Exchange, in the year 2010, had embarked on India☂s first Shariah compliant Islamic index, alias SHA 50. Apprehensively, the present study aims to compare the performance of SHA 50 and Nifty 50. The data is derived from the official website of Bombay Stock Exchange and National Stock Exchange. It is found that SHA 50 is giving higher return than that of Nifty 50 and at the same time the volatility of SHA 50 is lesser than that of Nifty 50. But when risk adjusted return using Capital Asset Pricing Model is used Nifty 50 performs better than SHA 50. Nonetheless, the Islamic index can be considered to develop financial product which is acceptable to those people who are averse to investing in the stock market due to the religious constraints.

Islamic Equity Investing: AlternativePerformance Measures and Style Analysis

We examine the performance of Islamic equity indices in comparison to their conventional market benchmarks around the world. First, using a variety of alternative performance measures based on, e.g., lower partial moments, drawdown, and value at risk, we document that Islamic indices outperform in developed markets, while they tend to underperform in emerging markets. Second, the style analysis reveals that Islamic indices in developed markets exhibit a strong growth-orientation in their investment behavior, while they show a substantial large cap bias in emerging markets. Finally, the significant overweighting of stocks from the energy and materials sectors relative to the market is identified as one of the main performance drivers of Islamic indices.