Are investments in islamic REITs susceptible to forex uncertainty: wavelet analysis

Mokhtar, Maznita and Masih, Mansur (2013): Are investments in islamic REITs susceptible to forex uncertainty: wavelet analysis.

Abstract

Since its debut into the islamic capital markets landscape in 2005, islamic Real Estate Investment Trusts (REITs) have not shown significant progress in attracting foreign investment, limiting their potential as the ideal asset class for the Shariah compliant investor. It was suggested that a stronger local currency (Ringgit Malaysia) would encourage foreign investors to acquire Malaysian REITs as a hedge against the rising inflation that follows economic growth. This paper aims to examine the relationship between Islamic Malaysian REITs (islamic MREITs) returns and foreign exchange fluctuations. We apply the Maximum Overlap Discrete Wavelet Transform (MODWT), using wavelet function of symmlet 8, as well as the wavelet coherency based on Continuous Wavelet Transform (CWT) to understand the relationships sought in time dimension as well as frequency dimension. Our contribution includes a fresh perspective on the under-researched islamic REITs class of assets, as well as a multi-scale analysis of their relationship with foreign exchange movements. Our findings show that forex returns is not significantly related to the islamic REITs‟ returns, even though results show that it is significantly related to the REITs market index return. However, a fundamental long term relationship between islamic REITs and the foreign exchange does exist. There is evidence that the MREIT market leads the forex for a short period during the crisis recovery. Ultimately, the islamic REITs are not susceptible to forex uncertainty, implying that REIT managers need to enhance investment interests by other means.

• Item Type: MPRA Paper
• Language: English
• Keywords: MODWT, REIT, i-REIT, MREIT, foreign exchange (forex), frequency, wavelet, correlation, coherence, lead-lag, contagion
• 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 > G2 - Financial Institutions and Services

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