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Socially responsible investment and Shariah-compliant investment compared: Can investors benefit from diversification? An ARDL approach

Chowdhury, Mohammad Ashraful Ferdous and Masih, Mansur (2015): Socially responsible investment and Shariah-compliant investment compared: Can investors benefit from diversification? An ARDL approach.

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Abstract

Islamic finance and Socially Responsible Investment (SRI) have been two of the most rapidly growing areas of finance over the last two decades. During this period, they have each grown at rates that far exceed that of the financial markets as a whole. The purpose of this paper is to take a comparative approach in comparing and contrasting the performance of both types of restricted investment portfolios by using ARDL bounds testing approach. The paper provides an innovative view to two different markets and suggests that there are commonalities which need to be exploited for the benefit of both markets. The study assesses the extent of correlation between social responsible investment funds and Sharia compliant investment funds in different economic situations to determine if the nature of relationship between funds changes in between the non-crisis period and the 2007 crisis period for four markets such as Dow Jones Islamic World, Dow Jones Islamic Europe; Dow Jones Sustainability World and Dow Jones Sustainability Europe. By estimating the short and long term dynamics between the socially responsible investment indexes and Islamic indexes, and the extent of cointegration between these two funds, the findings tend to indicate that the SRI and Islamic funds have significantly different behavior in both the short run and long run. Despite the differences in the screening criteria and portfolio management of both types of funds, this study suggests that the potential diversification benefits between Sharia compliant funds and the SRI funds are possible both in the crisis period and non-crisis period.

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