Co-Movement, Dependence Structure and Ethical Investment Funds under GFC

Abstract

This paper extends the recent work of Mansor et al. [1] who use panel regression to measure ethics based Islamic mutual fund performance and note the various methodological issues in this respect. We attempt to capture the co-movement and dependence structure of the fund index with five major equity indices before and during the Global financial crises (GFC). Four models-CAPM, normal Copula, symmetrised Joe-Clayton Copula and Rotated Gumbel Copula-are used to analyse the co-movement and dependence structure of Islamic investment funds. Our findings show that the ethical investment funds have low dependence with the major market indices. The fluctuations in the financial markets in the U.S., the U.K., Germany and Japan are less likely to affect the Islamic investment funds than other financial assets. However, the time-varying dependence increases dramatically during the GFC indicating that the diversification merits of Islamic equity funds in the portfolio deteriorate in the bear market. Some of the empirical results drawn in this paper will raise awareness among both academicians and financiers about the importance of Islamic investment funds during and out of crises periods.

Corporate governance mechanism and the risk exposure of Islamic mutual funds: evidence from Islamic countries

“…These studies only investigated the risk exposure of mutual funds without paying attention on the determinants of mutual fund risk. Luo and Bhatti (2019) analyzed the co-movement and dependence structure of Islamic mutual funds using copula methods and showed that Islamic mutual funds have low dependence with various market indices. Mansor et al (2019) analyzed the performance of Islamic mutual funds along with analyzing the risk exposure of these funds.…”

New evidence on fund performance in extreme events

“…This study employs various market risk-adjusted performance measures to estimate the funds’ overall performance during the crises periods, using CAPM rather than complex copula (Luo and Bhatti, 2019) and/or DCC (Al Rahahleh and Bhatti, 2017a, b) models.…”

“…Currently, published research on IMFs is growing, and recently gathered momentum in the global market as well as in the segmented market. Most studies have not found a significant performance differential between the Islamic fund institutions and their conventional counterparts (see, Al Rahahleh and Bhatti, 2017a, b; Elfakhani et al , 2007; Girard and Hassan, 2008; Hayat and Kraeussl, 2011; Hoepner et al , 2011; Mansor and Bhatti, 2011; Mansor et al , 2015; Luo and Bhatti, 2019; Rahman et al , 2018). Elfakhani et al (2007) used 46 global IMFs and found no statistical difference in the performance of Islamic and conventional equity funds in relation to the returns of respective market indices for the period January 1997 to August 2002.…”

“…Moreover, Luo and Bhatti (2019) employed copula technique (normal symmetry Joe-Clayton, Rotated Gumbel Copula) to analyze the co-movement and dependence structure of IMF. They observed that the IMF low dependence with the major market indices.…”

“…This paper is motivated by Luo and Bhatti’s (2019) study who employed various copulas to capture the co-movement and dependence structure of ethical investment funds and noted that the funds have a minimal dependence on major international market indices. A class of ethical funds consists of religious sustainable, socially responsible and impact-investing (SRI) funds.…”