Risk-return characteristics of Islamic equity indices: Multi-timescales analysis

• Published in: Journal of multinational financial management 2015-02, Vol.29, p.115-138
• Main Authors: Dewandaru, Ginanjar, Bacha, Obiyathulla Ismath, Masih, A. Mansur M., Masih, Rumi
• Format: Article
• Language: English
• Subjects: Capital returns; Emerging markets; Equity; Financial risks; Islam; Islamic finance; Risk-return profile; Shariah-compliant stocks; Systemic risk; Volatility; Wavelet analysis
• ISSN: 1042-444X; 1873-1309
• DOI: 10.1016/j.mulfin.2014.11.006

•We explore systemic risk, return, volatility, and correlation in Islamic indices.•The sample includes the Dow Jones of 11 countries and 10 global sectors.•The method is wavelet decomposition to perform multi-horizon analysis.•We find equal returns with lower risks at higher scales for some Islamic indices.•We find lower correlations at lower scales for a few Islamic sector-indices. This paper is motivated by the heightened interest in investing in Islamic equities. The paper is the first attempt at analysing the risk-return characteristics of Islamic indices at different timescales by applying a relatively new approach in finance known as wavelet analysis. We analyze the Dow Jones indices of 11 countries, mostly emerging markets, and 10 global sectors between 2008 and 2012. We focus on exploring the multi-horizon nature of systemic risk (market beta), average return, volatility, and correlation. We find that the differences in betas between Islamic and conventional indices at most of the timescales are not statistically significant. A few exceptions show equal returns with lower risks for Islamic indices mostly at higher time scales (longer horizons) in some countries as well as 6 out of 10 sectors. We also find lower correlations for some Islamic sector-pairs (financials, utilities and consumer services) at lower time scales (shorter horizons).