The inflation hedging capacity of Islamic and conventional equities

Abstract

PurposeThis study analyzes the inflation hedging of Islamic and conventional equities by employing 26 indices for the period ranging from January 1996 till August 2018. The authors investigate the decoupling hypothesis for Islamic versus conventional equities across various investment horizons.Design/methodology/approachThe authors employ a vector autoregressive framework coupled with bootstrapping procedure to compute inflation hedging measures. The hedging measures employed account for the inflation hedging capacity in terms of hedging effectiveness as well as the cost of hedging (efficiency). The authors account for various investment horizons ranging from one month to ten years.FindingsAlthough, the authors do not find consistent evidence for the decoupling hypothesis of Islamic and conventional equities in terms of their inflation hedging capacity. However, the authors document that certain Islamic equity indices can be employed to effectively hedge against the risk of inflation.Originality/valueThe main contribution of this study is that the existing literature on the comparative performance of Islamic versus conventional equities against inflation risk is sparse. The purpose of this study is to analyze the inflation hedging attributes of Islamic versus conventional equities, that is, whether Islamic equities render better real returns than their conventional counterparts. It will contribute to the growing literature on the comparison between Islamic and conventional equities by documenting the real return attributes of these two, apparently different, assets. A further contribution is that in order to account for the different investment horizons for different types of investors, this study will quantify the real return attributes of Islamic and conventional equities for short-, medium- and long-term investors.

Islamic equity investments and the COVID-19 pandemic

“…Investment vehicles following Islamic finance principles have specific characteristics such as debt avoidance (low risk), linkages with the real economy, and risk-sharing that may provide a buffer to economic shocks ( Abedifar et al, 2015 ; Chapra, 1985 ; Ebrahim, 2009 ; Ibrahim, 2016 ; Umar et al, 2020 ; Shahzad et al, 2017 ; Umar and Gubareva, 2021 ). Empirical literature supports this argument by showing better performance of Islamic indexes in the immediate aftermath of the GFC ( Alam and Rajjaque, 2016 ; Ashraf, 2013 ; Hoepner et al, 2011 ; Masih et al, 2018 ; Saiti et al, 2014 ).…”

The impact of Coronavirus (COVID-19) outbreak on faith-based investments: An original analysis

“…Arguably the most contentious issue about faith-based investments vehicle is whether ethical overlays have a bearing on financial performance. Whilst a number of previous studies have considered this area ( Hammoudeh et al, 2014 , Al-Khazali et al, 2014 , Fu et al, 2020 , Abu-Alkheil et al, 2020 , Umar et al, 2020 , Climent et al, 2020 , Haddad et al, 2020 , Rehman et al, 2020 , Anjum, 2020 , Widyanata and Bashir, 2020 , Sherif, 2016 ), much uncertainty remains regarding the significant differences between conventional and faith-based investments. The general perception and critique facing ethical investments stem from their contradiction with the principles of the efficient portfolio theory of Markowitz 1952, cited in Dhrymes (2017) .…”

Faith-based investments and the Covid-19 pandemic: Analyzing equity volatility and media coverage time-frequency relations

“…It is based on a set of financial ratios allowing to remove from the investment targets those companies, which, although involved in Islamic law compliant businesses, obtain a large share of their revenues out of non-Shariah-compliant activities, such as borrowing and/or lending money on interest as well as holding a large proportion of assets in liquid form. Most of the research on the Islamic equity markets is based on a comparative analysis of the Islamic and conventional equities and it is motivated by the decoupling hypothesis ( Dharani et al, 2019 ; Jawadi et al, 2020 ; Umar, 2017 ; Umar et al, 2020 ).…”