GRM 2010 GRM 2011

Abstract Details

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Do the Shari’ah investors have any advantage over the conventional ones in regard to risk and stock return? An application of Wavelet timescale decomposition analysis across different countries and sectors
Paper Proposal Text :
The paper is the first attempt to analyze risk-return characteristics of Islamic stock indices, as compared to the conventional counterparts, at different timescales by applying a relatively new econometric technique in finance known as wavelet decomposition analysis. Since Islamic stocks have some distinguished features relative to the conventional one, i.e. lower financial leverage, smaller size of firms, under-diversified market, and some constraints of investing in non-compliant activities, therefore the performance of the two theoretically will not be similar. We made an initial attempt to analyze the 11 countries and 10 global sectors indices between 2008 and 2011 to examine the multi-horizon nature of systematic risk beta, average return, volatility, and correlation among different assets. The overall results of our study are plausible and intuitive and have strong policy implications.
Our first finding shows that both Islamic and conventional indices demonstrate the similar tendency, where systemic risks or betas becomes generally stronger at higher scales of the two variables, indicating a stronger relation between return and risk as we move into longer horizon. As regards to the comparison between the Islamic and conventional one, the differences of betas and returns at most of timescales are not statistically significant, both in country and sector indices. We can find a similar evidence for GCC but, interestingly, the volatility of Islamic index in GCC is significantly higher at the most of lower timescales, reflecting the shorter horizons. It can be understandable if we consider the adverse impact of US subprime crisis to GCC; meanwhile the shorter horizons may imply that the effect is transitory. The higher volatility with equal beta and return may indicate overprice of risk.
To compare with other countries, there are some exceptions that compliant investors may take an advantage position against conventional counterparts. More specifically, we find the superior returns of Islamic stocks in some countries as well as sectors, particularly in longer horizon. The rationale will be the equal returns with lower betas for Islamic indices, suggesting underprice of risk, where we can find in Turkey, US, UK, as well as six out of ten sectors. This may suggest that Islamic investors can outperform their conventional counterparts if they invest in the long term.
In terms of co-movements among country-indices, we cannot find any significant difference as compared to conventional counterparts. However, we find that the correlations between financials, utilities, and consumer services, with remaining sectors, are significantly lower for Islamic sector pairs, suggesting that Islamic investors should emphasize on sector diversification rather than country diversification in order to optimize their portfolio performance against conventional counterparts. Finally, the results of wavelet cross-correlation suggest that the impact of crisis to Islamic markets, even though it is statistically significant, is transmitted mostly via fundamental linkages at higher timescales, which represents the real sector in the economy. In regards to GCC, it seems that this country is affected in the short run as well as long run since the impact is significant at all timescales.