Are There Profit (Returns) in Shariah-Compliant Exchange Traded Funds? The Multiscale Propensity

Farouk, Faizal and Masih, Mansur (2014): Are There Profit (Returns) in Shariah-Compliant Exchange Traded Funds? The Multiscale Propensity.

Abstract

This paper investigates the co-movement of nine Islamic Exchange Traded Fund (ETF) returns using wavelet coherence methods. The results tend to indicate consistent co-movement between most of the ETF returns especially in the long run. The study also uncovers evidence of wide variation of co-movement across the time-scales during the global financial crisis and the Euro debt crisis. Strong co-movement can be observed during the global financial crisis, both for the medium term investors and long term investors. The paper also studies the relationship between different ETF returns using wavelet multi-resolution analysis. The cross-correlation analysis also shows certain significant and positive correlations between the ETF returns, especially during the period of global financial crisis. The findings from these two recent dynamic time-scale decomposition methodologies have important policy implications for risk management and investors’ investment policy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Islamic exchange traded fund returns, Wavelet coherence, MODWT
• 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 > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

References

Abdou Diaw, Salwana Hassan and Adam Ng Boon Ka(2010). “Performance of Islamic and Conventional Exchange Traded Funds in Malaysia.”, ISRA International Journal of Islamic Finance, 2(1), Kuala Lumpur.

Aguiar-Conraria, L. and Soares, M.J. (2011). “Oil and the macroeconomy: using wavelets to analyze old issues.” Empirical Economics, 40, 645–655.

Alam N. (2012). “A comparative performance analysis of conventional and Islamic exchange-traded funds.” Journal of Asses Management, 14(1), 27-36

Appel, Marvin (2006), “Investing with Exchange-Traded Funds Made Easy”, FT Press, New Jersey, USA.

Benhmad, F. (2012). “Modelling nonlinear Granger causality between the oil price and U.S. dollar: A wavelet based approach.” Economic Modelling, 29, 1505-1514.

Charupat, Narat and P. Miu (2011). “The pricing and performance of leveraged exchanged-trade funds.” Journal of Banking and Finance, 35, 966-977.

Chen, J.-H. and Huang C.-Y. (2010). “An analysis of spillover effects of exchange traded funds.” Applied Economics, 42, 1155-1168.

Chu, P.K.K. (2011). “Study on the tracking errors and their determinants: evidence from Hong Kong exchange traded funds.” Applied Financial Economics, 21, 309-315

Curcio, Richard J., Anderson, R.I., Guirguis H. and Boney, V. (2012). “Have leveraged and traditional ETFs impacted the volatility of real estate stock price.” Applied Financial Economics, 22, 709-722.

Durai S.R.S., and S.N. Bhaduri (2009). “Stock prices, inflation and output: Evidence from wavelet analysis.” Economic Modelling, 26, 1089-1092.

El-Sharif, I, Brown, D., Nixon B. and Russel, A. (2005). “Evidence on the nature and extend of the relationship between oil and equity value in UK.” Energy Economics, 27(6), 819-930.

Gallagher, David and Reuben Segara (2006). “The Performance and trading characteristic of exchange-traded funds”. Journal of Investment Strategy, 1(2).

Gencay, R., Selc¸uk, F. and Whitcher, B. (2002). “An Introduction to Wavelets and Other Filtering Methods in Finance and Economics.” Academic Press, London

Grinsted, A., Moore, J.C. and Jevrejeva, S. (2004). “Application of the cross wavelet transform and wavelet coherence to geophysical time series.” Nonlinear Processes in Geophysics 11, 561–566.

Gurley, K. and Kareem, A. (1999). “Applications of wavelet transforms in earthquake, wind and ocean engineering.” Engineering Structures 21 (2), 149–167.

Gurley, K., Kijewski, T. and Kareem, A. (2003). “First-and higher-order correlation detection using wavelet transforms.” Journal of Engineering Mechanics 129 (2), 188–201.

Gutierrez, Jose A., V. Martinez and Y. Tse (2009). “Where does return and volatility come from? The case of Asian ETFs.” International Review of Economics and Finance, 18, 671-679.

Ho, C.S.F., N.A.A. Rahman, N.H.M. Yusuf and Z. Zamzamin (2014). “Performance of global Islamic versus conventional share indices: International evidence.” Pacific-Basin Finance Journal, 28, 110 – 121.

http://www.fma.org/Reno/Papers/Exchange_Traded_Funds_Performance_and_Competititon.pdf , Financial Management Association International, Accessed 4th March 2014 http://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2007-Vienna/Papers/0232.pdf, European Financial Management Association, Accessed 4th March 2014

Huang, Mei-Yueh and J.B. Lin (2011). “Do ETFs provide effective international diversification?” Research in International Business and Finance, 25, 335-344

In, Francis and S. Kim (2013). “An Introduction to Wavelet Theory in Finance – A Wavelet Multiscale Approach.” World Scientific Publishing, Singapore.

Jawadi, F, N. Jawadi and W Louhichi (2005). “Conventional and Islamic stock price performance: An empirical investigation.” International Economics, 137, 73-87

Karen H., Y. Wong and Wai Cheong Shum (2010). “Exchange-traded funds in bullish and bearish markets.” Applied Economics Letters, 17(16), 1615-1624

Kim, S. and F. In (2005). “The relationship between stock returns and inflation: new evidence from wavelet analysis.” Journal of Empirical Finance. 12, 435– 444

Krause, Timothy and Y. Tse (2013). “Volatility and return spillover in Canadian and U.S. industry ETFs.” International Review of Economics and Finance, 25, 244-259

Lin C.-C. and Chiang M.-H (2005). “Volatility effect of ETFs on the constituents of the underlying Taiwan 50 Index.” Applied Financial Economics, 15, 1315-1322

Loh, L. (2013). “Co-movement of Asia-Pacific with European and US stock market returns: A cross-time-frequency analysis.” Research in International Business and Finance, 29, 1-13

Mallat, S.G. (1989). “A theory for multiresolution signal decomposition: the wavelet representation.” IEEE Transactions on Pattern Analysis and Machine Intelligence 11 (7), 674–693

Masih M, M Alzahrani and O. Al-Titi (2009). “Systematic risk and time scales: New evidence from an application of wavelet approach to the emerging Gulf stock markets.” International Review of Financial Analysis. 19, 10-18.

Percival, D.B. and Walden, A.T. (2000). “Wavelet Methods for Time Series Analysis.” Cambridge University Press, Cambridge, U. K.

Reboredo, J.C. and M.A. Rivera-Castro (2013). “A Wavelet decomposition approach to crude oil price and exchange rate dependence.” Economic Modelling, 32, 42-57

Reboredo, J.C. and M.A. Rivera-Castro (2014). “Wavelet-based evidence of the impact of oil prices on stocks return.” International Review of Economics and Finance 29, 145-176

Rompotis, G.G. (2008), “Performance and trading characteristics of German passively managed ETFs”, International Research Journal of Finance and Economics, 15, 218-231.

Rompotis, G.G. (2011). “Predictable patterns in ETFs’ return and tracking error”, Studies in Economics and Finance, 28(1), 14-35.

Rua, Antonio and L.C. Nunes (2009). “International comovement of stock market returns: A wavelet analysis.” Journal of Empirical Finance, 16, 632-639

Sadorsky, P (2001). “Risk factors in stocks returns of Canadian oil and gas companies.” Energy Economics, 23, 17-28.

Tiwari, A.K. (2013). “Oil prices and the macroeconomy reconsideration for Germany: Using continuous wavelet.” Economic Modelling, 30, 636-642

Tiwari, A.K., C. Oros and C.T. Albulescu (2014) “Revisiting the inflation-output gap relationship for France using a wavelet transform approach.” Economic Modelling 37, 464-475

Torrence, C. and Compo, G.P. (1998). “A practical guide to wavelet analysis.” Bulletin of the American Meteorological Society 79, 605–618

Torrence, C. and Webster, P. (1999). “Interdecadal changes in the ESNOM on soon system.” Journal of Climate 12, 2679–2690

Uddin G.S., A.K. Tiwari, M Arouri and F. Teulon (2013). “On the relationship between oil price and exchange rates: A wavelet analysis.” Economic Modelling 35, 502-507.