Hidden cointegration reveals hidden values in Islamic investments

Alexakis, Christos; Pappas, Vasileios; Tsikouras, Alexandros

doi:10.1016/j.intfin.2016.08.006

Cited by 35 publications

(21 citation statements)

References 46 publications

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“…This may be in part attributed to their stronger financial profile coupled with an abstinence from risk as entailed from their higher liquidity and capitalisation ratios. In summary, our findings corroborate the theory that Islamic finance investments are less risky, findings which has been verified for Islamic banks (Čihák and Hesse, 2010;Pappas et al, 2016) and using Islamic equity indices (Alexakis et al, 2016;El Alaoui et al, 2015 andEl Khamlichi et al, 2014).…”

Section: Multivariate Var and Essupporting

confidence: 88%

To debt or not to debt: Are Islamic banks less risky than conventional banks?

Sorwar

Pappas

Pereira³

et al. 2016

Journal of Economic Behavior & Organization

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Highlights1. The aim of this paper is to compare estimates of market risk for Islamic and conventional bank over for the period 2000-2013 across pre-financial crisis, during financial crisis and post financial crisis periods. To the best of our knowledge this is the first attempt to compare and contrast the market risk of Islamic banks with conventional banks. 2. We use estimates of Value-at-Risk (VaR) and Expected Shortfall (ES) which incorporates losses beyond VaR as market risk measures for both univariate and multivariate portfolios. 3. Univariate analysis finds no discernible differences between Islamic and conventional banks. However, dynamic correlations obtained via a multivariate setting shows Islamic banks to be less riskier for both sets of conventional banks; and especially so during the recent global financial crisis. 4. The policy implications are: (i) that the inclusion of Islamic banks within asset portfolios may mitigate potential risk; (ii) that the Basel committee should consider the ES measure 2 of risk for Islamic banks in preference to the current VaR methodology, which overestimates the market risk of Islamic banks. Abstract We empirically analyze the market risk profiles of Islamic banks with two sets of conventional banks taken from the same geographical locations as Islamic banks and from a random global sample respectively for the period 2000-2013. Moreover, we divided our sample period into prefinancial crisis, during financial and post financial crisis. Estimates of Value-at-Risk (VaR) and Expected Shortfall (ES) which incorporates losses beyond VaR are used as market risk measures for both univariate and multivariate portfolios. Our key input is the share price by market capitalization of publicly traded banks of similar size in Islamic and non-Islamic countries. Univariate analysis finds no discernible differences between Islamic and conventional banks. However, dynamic correlations obtained via a multivariate setting shows Islamic banks to be less riskier for both sets of conventional banks; and especially so during the recent global financial crisis. The policy implications are: (i) that the inclusion of Islamic banks within asset portfolios may mitigate potential risk; (ii) that the Basel committee should consider the ES measure of risk for Islamic banks in preference to the current VaR methodology, which over-estimates the market risk of Islamic banks.JEL classification: C53, C58, G01, G21

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Section: Multivariate Var and Essupporting

confidence: 88%

To debt or not to debt: Are Islamic banks less risky than conventional banks?

Sorwar

Pappas

Pereira³

et al. 2016

Journal of Economic Behavior & Organization

Self Cite

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show abstract

“…The parameter z t in the model is the equilibrium term (error correction mechanism) allowing the variables to revert back to the long‐run equilibrium whenever they deviate from the steady state equilibrium. Following Alexakis et al (), we added two control variables to test for the impact of global macroeconomic variables, namely, the VIX measure of stock market volatility and oil prices (Brent Crude).…”

Section: Methodsmentioning

confidence: 99%

“…Ajmi, Hammoudeh, Nguyen, and Sarafrazi (), applying linear and nonlinear Granger causality tests, found significant causality between Islamic and conventional stock markets. Alexakis, Pappas, and Tsikouras () provided evidence for bidirectional dynamics during downward and upward market movements, though Islamic indices are the least responsive during bad times.…”

Section: Literature Review and Hypothesesmentioning

confidence: 99%

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Islamic, socially responsible, and conventional market comovements: Evidence from stock indices

Paltrinieri

Floreani

Kappen

et al. 2018

Thunderbird Intl Bus Rev

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This article extends the literature on ethical investment risks, correlations, and comovements. Through a sample of 17 Islamic, socially responsible investment (SRI), and conventional stock indices, we investigate cointegration and dynamic correlations for the period 2005–2015. We also examine these stock indices’ responses to two major economic factors, namely, oil prices and market volatility. Our results show cointegration between Islamic, SRI and conventional stock indices, and comovements with mutual causalities. During crises, dynamic correlations tend to spike; however, quite a different pattern emerges during postcrisis periods when there is more variability in conditional covariances. Finally, we provide evidence that all three types of stock indices react positively to oil price changes, but negatively to global equity market volatility, albeit with different magnitudes. Overall, investors can obtain portfolio diversification benefits through SRI and Islamic stock indices, particularly in postcrisis periods.

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“…Conventional banks are financial institutions that run their business conventionally. Meanwhile, the Islamic bank is a financial institution that runs its business based on Islamic rule (Alexakis, Pappas, & Tsikouras, 2016). The difference between them lies in the return and distribution of profits provided by the customer to the bank, or vice versa.…”

Section: The Introductionmentioning

confidence: 99%

Advantages and Risks of Islamic Investment

Toto

Herlina

Darna

2020

nurani

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In the Islamic context, investing is highly recommended so that the future can be guaranteed. Of course, investments made by Muslims must be in accordance with Islamic rules. Investing in economy Islamic concepts will provide a sense of security and comfort for Muslim investors, without fear of deviating from Islamic teachings. As a devout Muslim, of course, investment choices must be appropriate and in accordance with the concept of Islam. The difference between conventional Islamic investment lies in the benefits given. The advantages of Islamic investment are in the form of profit sharing, while the conventional concept is interest. In the teachings of Islam, interest is haram, because it does not recognize value for money. In the view of Islam, money will not developed by itself but must go through productive and ruleful efforts. The purpose of making this paper is to discuss the advantages and risks in Islamic investment. This paper uses a literature review approach that comes from journals, books, the internet, and other sources. The results show that the advantages of Islamic investment are riba-free, minimal risk, Islamic management, halal and promoting social activities. Meanwhile, the risks that may be faced by investors are the risk of losing capital, the risk of uncertainty of return, and the difficulty of selling investment products. From the results, it was found that currently Islamic investment products are favored by non-Muslims alike. The concept of profit sharing is considered more profitable than interest. It can be concluded that Islamic rules can now be accepted by various groups of people in the world.

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Hidden cointegration reveals hidden values in Islamic investments

Cited by 35 publications

References 46 publications

To debt or not to debt: Are Islamic banks less risky than conventional banks?

To debt or not to debt: Are Islamic banks less risky than conventional banks?

Islamic, socially responsible, and conventional market comovements: Evidence from stock indices

Advantages and Risks of Islamic Investment

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