Integration between the conventional and Islamic stock indices with the US stock market: evidence from cointegration analysis
Background:A low correlation between returns of cross-border stock market indices allows investors to minimize portfolio risk through international diversification. Due to high comovement among conventional stock indices, international investors are looking for different cross-border or asset cla...
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| Format: | Article |
| Language: | English |
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INSI Publications
2014
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| Online Access: | http://irep.iium.edu.my/44499/ http://irep.iium.edu.my/44499/ http://irep.iium.edu.my/44499/1/18-30.pdf |
| Summary: | Background:A low correlation between returns of cross-border stock market indices
allows investors to minimize portfolio risk through international diversification. Due to
high comovement among conventional stock indices, international investors are looking
for different cross-border or asset classes such as ethical and Shari‟ah-compliant
investments to reap the benefits of diversification. Objective: This paper investigates
the comovement of conventional and Islamic stock indices in the daily returns among
conventional and Islamic stock indices in East Asia and selective Islamic countries
through the application of cointegration analysis. Our study is focused on investigating
the following empirical question: Are the Islamic stock indices less cointegrated with
the US market compared to that of the conventional indices with the US? Results: Our
findings based on several cointegration techniques tend to suggest: the stock indices of
Islamic countries cointegrated with the US stock index is weaker compared to that of
the non-Islamic countries. This observation is based on the number of cointegrating
vectors in Islamic countries with the US being much less compared to the number of
cointegrating vectors in the non-Islamic countries with the US. Conclusion:The
evidence of less cointegration between the stock indices of Islamic countries (compared
to non-Islamic countries) with the US stock index, indicates the possibility of potential
gains through diversification of Islamic investment portfolios with the US market.
Knowledge of financial cointegration among stock indices is important for portfolio
diversification by international investors.
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