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Does the shariah index move together with the conventional equity indexes?

Park, Kwang Suk and Masih, Mansur (2015): Does the shariah index move together with the conventional equity indexes?

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Abstract

Generally, Shariah (Islamic) indices are considered to have lower portfolio betas relative to conventional ones. The lower portfolio beta of Islamic indexes is a logical result of Shariah screening. As Shariah screening eliminates stocks with high financial leverage, the resulting portfolio beta ought to be lower because a stock’s beta is reflective of the underlying business risk and financial risk (leverage). With this motivation and background, we have tried to find out whether we can have diversification opportunities with combining Shariah index and conventional indexes. The results of analysis revealed the absence of cointegration between the DJIM index and three conventional indexes such as DAX, HangSeng, KL. This means that diversification opportunities exist for the mentioned indices. But for the S&P and DJIM, we found that they are cointegrated, which implies there exists long run theoretical relationship among the indices. Presence of cointegration indicates the absence of diversification opportunities in the concerned indices. So if we want to get diversification effect, we have to avoid setting up the portfolio with S&P and DJIM with the balanced weight. Because these two variables move together, the investors are not likely to get the positive portfolio effect particularly in the long term.

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