Are Islamic finance innovations enough for investors to escape from a financial downturn? Further evidence from portfolio simulations

Abstract

International audienceDoes Islamic finance constitute a promising solution for the current global financial crisis and are Islamic financial innovations enough to reassure investors, stabilize financial systems and provide them with a means of escaping from financial downturns? This article addresses these questions while investigating the dynamics of Islamic and conventional stock prices over the last few years. In particular, we apply Multivariate Vector Autoregressive (VAR) tools to test the interaction between conventional and Islamic financial products, and implement the Granger causality test to specify the dependence orientation of feedback between Islamic and conventional stock prices. Our article differs from previous work on the topic in that it develops portfolio simulations to determine whether Islamic finance can supplant conventional finance by generating investment and diversification opportunities during periods of crisis. In addition, we develop optimal portfolio strategies and investment proportions for conventional and Islamic funds to ensure the best resource allocation. Our main findings are: (i) the impact of the current crisis on the Islamic finance industry is less marked than on conventional finance, (ii) investment in Islamic products generates high returns, (iii) portfolios that include Islamic products reduce systemic risk and generate significant diversification benefits, (iv) the US crisis has led to significant changes in resource allocation through changes in investment choices

Performance of Islamic and conventional stock indices: empirical evidence from an emerging economy

“…Recent studies on performance analysis of global Islamic indices include Guyot (2011), El Khamlichi and Sarkar (2012), Jouaber-Snoussi et al (2012), and Arouri et al (2013). Guyot (2011) analyzes nine Dow Jones Islamic indices (DJIM) and finds no cointegration between Islamic and non-Islamic indices.…”

“…In addition, Dow Jones Islamic index and S&P Islamic index are not co-integrated with their conventional counterparts. Arouri et al (2013) examines the impact of current global financial crisis on 3 Dow Jones Islamic indices to see whether Islamic finance constitute a potential solution in reassuring investors and stabilizing financial systems to escape from financial downturns. They employ Multivariate Vector Autoregressive (VAR) and Granger Causality test to test the interaction between Islamic and conventional financial products and specify the dependence orientation of feedback between screened and unscreened stock prices, respectively.…”

Asymmetric Return and Volatility Transmission in Conventional and Islamic Equities

“…The bulk of the existing literature is focused on the comparative performance of Islamic and conventional financial assets [1][2][3][4][5][6][7][8] The issue of potential risk transmission between Islamic and conventional financial assets is relatively less explored. This paper contributes toward this strand of literature by analysing the risk transmission mechanism between Islamic and conventional equities.…”

Can the Islamic bank be an emerging leader? A panel data causality analysis

“…This topic is of interest since prior studies (Arouri et al 2013;Jawadi, Jawadi, and Louhichi 2014; have shown the high level of performance and efficiency of Islamic finance relative to conventional finance. Our article seeks to better clarify the opportunity and interest of Islamic banking.…”