Does Islamic equity investment provide diversification benefits to conventional investors? Evidence from the multivariate GARCH analysis

Abstract

Purpose The purpose of this paper is to quantify the extent to which the Malaysia-based equity investors can benefit from diversifying their portfolio into the conventional and Islamic Southeast Asian region and the world’s top ten largest equity indices (China, Japan, Hong Kong, India, the UK, the USA, Canada, France, Germany and Switzerland). Design/methodology/approach The multivariate GARCH-dynamic conditional correlation is deployed to estimate the time-varying linkages of the selected conventional and Islamic Asian and international stock index returns with the Malaysian stock index returns, covering approximately eight years daily starting from 29 June 2007 to 30 June 2016. Findings In general, in terms of volatility, the results indicate that both Asian and international Islamic stock indices are more or less volatile than its conventional counterparts. From the correlation analysis, we can see that both the conventional and Islamic MSCI indices of Japan provide more diversification benefits compared to Southeast Asian region, China, Hong Kong and India. Meanwhile, in terms of international portfolio diversification, the results tend to suggest that both the conventional and Islamic MSCI indices of the USA provide more diversification benefits compared to the UK, Canada, France, Germany and Switzerland. Originality/value The findings of this paper may have several significant implications for the Malaysia-based equity investors and fund managers who seek for the understanding of return correlations between the Malaysian stock index and the world’s largest stock market indices in order to gain higher risk-adjusted returns through portfolio diversification. With regard to policy implications, the findings on market shocks and the extent of the interdependence of the Malaysian market with cross-border markets may provide some useful insights in formulating effective macroeconomic stabilization policies in the efforts of preventing contagion effect from deteriorating the domestic economy.

Stock Market Integration of Pakistan with Its Trading Partners: A Multivariate DCC-GARCH Model Approach

“…The kurtosis values represent the fatness of the tails of the distribution and distribution of data around the mean. All the kurtosis values are greater than 3 which show that data are not normally distributed [59,60]. The Jarque-Bera test of normality rejects the null hypothesis of normality at 1% significance level.…”

“…The diagonal elements of the covariance matrix represent the unconditional volatilities. We found that value of unconditional volatility in all the markets is near to 1 which is considered to be the high volatility in returns [56,60]. Table 8 reports the values for unconditional volatility ranking in which China shows the highest unconditional volatility, while Malaysia shows the lowest unconditional volatility, which indicates the stability in the Malaysian stock market.…”

“…Further degrees of freedom for the t-DCC model are below 30 which show that t-DCC model is superior to the Gaussian model. Therefore t-DCC model is considered a suitable model for a distribution having high kurtosis (heavy-tailed) values [42,53,56,60]. Henceforth, we follow the results of the t-DCC model.…”

“…The time-varying volatilities and correlations are important to determine the portfolio diversification benefits among the markets [60]. We used two DCC-GARCH models with Gaussian and t-distribution to make a comparison based on the maximum likelihood values.…”

The effectiveness of technical strategies in Malaysian Sharīʿah vs conventional stocks

“…Charles et al (2015) have argued that because Islamic indexes are subjected to less diversification as they predominantly focus on particular sectors, they have a significantly higher risk. Likewise, Saiti et al (2014) and Saiti and Noordin (2018) found that Islamic stock indexes do not provide the extra benefit of diversification in comparison to their conventional counterparts. In a similar vein, Albaity and Ahmad (2008) claimed that conventional equity indexes are less risky in comparison to their Islamic counterparts given fewer diversifications.…”