A new risk factor based on equity duration

2021

JIABR

Purpose The purpose of this study is to develop, test and examine econometric methodology for Sharīʿah-compliant duration models of Islamic banks. Design/methodology/approach The research evaluates all existing duration models from Sharīʿah’s perspective and develops a four-stage framework for testing Sharīʿah-compliant duration models. The econometric methodology consists of multiple regression, Johansen co-integration, error correction model, vector error correction model (VECM) and threshold vector error models (TVECM). Findings Regressions analysis suggests that returns on earning assets and interbank offered rates are significant factors for calculating the duration of earning assets, whereas returns paid on return bearing liabilities and average interbank rates of deposits are significant factors for duration of return bearing liabilities. VECM suggests that short run duration converges into long run duration and TVECM suggests that management of assets and liabilities also plays a significant role that can bring about a change of about 15% in respective durations. Practical implications Sharīʿah-compliant duration models will improve risk and Sharīʿah efficiency, which will ultimately improve market capitalization and returns stability of Islamic banks in the long run. Originality/value Sharīʿah-compliant duration models testing provides insight into how various factors, namely, rates of return, benchmark rates and managerial skills of Islamic bank risk managers impact durations of assets and liabilities. It also explains the future course of action for Sharīʿah-compliant duration model testing.

Section: Review Of Literaturementioning

confidence: 88%

Section: Methodsmentioning

confidence: 99%

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Stage-I Shariah compliant Macaulay’s duration model testing

2021

JIABR

“…Mohrschladt and Nolte (2018) extend the works of Merton (1973), Leibowitz (1986), Kadiyala and Subrahmanyam (2000), Dechow et al (2004) work of implied duration, Lettau and Wachter (2007), van Binsbergen et al (2012), Schröder and Esterer (2012) and Weber (2018) in the area of equity duration and present a new model of duration based on a new factor of estimating unexpected stock returns. However, this approach suffers from long-term instability of durations against slow movements in interest rates (Sweeney and Warga, 1986).…”

Section: Review Of the Literaturementioning

confidence: 71%

Macaulay’s theory of duration: 80-year thematic bibliometric review of the literature

2020

JES

PurposeThe purpose of this research is to propose a framework for research on Macaulay duration and establish future research directions.Design/methodology/approachThematic, bibliometric and content analyses have been used to review 168 research papers published between 1938 and 2019 taken from ISI Web of Science and Scopus contributed by leading authors, journals and regulatory bodies.FindingsIdentification and integration of themes of duration theory, duration model development and duration model implementation leading to unattended research gaps, and framework for research on Macaulay duration.Research limitations/implicationsThe study is based on an extensive review of the literature to extract important themes, research gaps and frameworks. It does not empirically investigate significance of Macaulay duration and various sectors.Practical implicationsThis research has several aspects that are helpful for practitioners. Macaulay duration has been the subject of empirical research only without any guiding framework. This research provides a platform to initiate profound researches in various areas of finance. Various proposed models are required to be tested under holistic approach in conventional and emerging fields, especially in Islamic settings.Originality/valueThis research highlights, research themes leading to framework, research gaps and factors that are crucial in developing, extending and testing duration models leading to enhancement of theoretical base of Macaulay duration.

“…He reports that with his concept of duration returns on bond portfolios can be maximized. Mohrschladt and Nolte (2018) propose a new Risk management in Islamic banks risk factor based on equity duration and find that new risk factor carries significant risk premium in cross section asset pricing models. Chattha and Alhabshi (2018) apply duration models consistent with the works of Koch and MacDonald (2009) and Chattha and Bacha (2010) and find that Islamic banks are more vulnerable as compared to their conventional counterparts.…”

Section: Literature On Various Duration Models and Their Applicationsmentioning

confidence: 99%

Duration model for maturity gap risk management in Islamic banks

2020

JM2

Purpose The purpose of this paper is to propose models of duration for maturity gap risk management in Islamic banks. Design/methodology/approach A thorough review of literature on duration modeling, duration measurement in Islamic banks and Shariah compliance has been conducted to set parameters to develop Shariah-compliant maturity gap risk management mechanism. Findings Models based on durations of earning assets and return bearing liabilities using various rates of return earned and paid, benchmark rates and industry standards commonly used by Islamic and conventional banks. Practical implications Increased Shariah compliance has threefold impact. Firstly, it will increase trust of customers. Secondly, it will help improve profitability by reducing non-Shariah compliance penalties from the regulators. And finally, it will enhance market capitalization and returns stability to investors because of enhanced customer base, increased level of trust and increased profitability. Originality/value This research proposes Shariah-compliant maturity gap risk management models based on the concept of duration according to recommendations of Bank for International Settlements. As there is no such maturity gap risk management mechanism that meets the requirements of Shariah using benchmarks that are common between Islamic and conventional banks; therefore, this research presents risk management solutions that can be applied simultaneously in the entire banking sector.