Is there any significant difference in global volatility of and correlation between shari’ah-compliant (Islamic) equities and sukuk ?

Abdullah, Mace and Masih, Mansur (2017): Is there any significant difference in global volatility of and correlation between shari’ah-compliant (Islamic) equities and sukuk ?

Abstract

Islamic finance is still both a nascent and niche market globally. That its products “mimic” their conventional counterparts is a constant cry of criticism often heard spoken among financial professionals. That financial products are developed and marketed in the global capital markets is axiomatic. Equally clear is the fact that equities and fixed-income securities form the two predominant pillars of the global capital markets. While there exist numerous studies of the covariances between equity and bond asset classes, the field is significantly narrowed as to those that apply the more recent financial techniques for measuring volatilities and correlations. There presently exist a veritable dearth of research as to whether Shari’ah-compliant equities and sukuk (a proxy for fixed-income or debt securities) have covariances and correlations similar to or different from those of their conventional counterparts. The level of inquiry should increase as more data presently exists on these Islamic asset classes and Islamic finance continues to gain ground in the global capital market. This study is a preliminary step towards answering the open question of the similarities and/or dissimilarities between the volatility and correlations between these two markets and asset classes. This study finds that there exist significant differences in the volatilities between Shari’ah-compliant equities and sukuk. It further finds that those differences are amplified by examining the behavior of the two asset classes during the recent 2007-2008 financial crisis. Moreover, it finds that the correlative behavior, in general, of these Islamic asset classes is not significantly different from that of their conventional counterparts.

• Item Type: MPRA Paper
• Language: English
• Keywords: Shariah-compliant (Islamic) equities, Sukuk, MGARCH, Wavelets
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

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