Malaysian investors’ perspectives on the integration and co- movement of Islamic stock markets in developed and developing countries

This chapter attempts to analyse the extent of financial integration of Islamic stock markets in two developed (the US and Japan) and two developing countries (China and India). The study takes the perspectives of the Malaysian Islamic investors in making their decisions about portfolio diversification, risk management and asset allocation. Despite the growing interest in Islamic finance, there are a few empirical studies investigating integration of Islamic stock markets. As a result, there is a certain gap in the literature pertaining to this area of research. By applying recent relevant techniques such as MGARCH-DCC and wavelets (both CWT and MODWT), this chapter examines the volatility and correlations among these Islamic stock markets in a time-variant manner to indicate the degree of financial integration among them. It is found that relatively strong financial integration exists between the Chinese and Malaysian Islamic stock markets. Furthermore, the study suggests that in the long run, investors in Malaysia could gain by diversifying their portfolios in Japan and in the short run the US market is a better option to consider. Overall, the developed Islamic stock markets are better for the Malaysian Islamic investors rather than the developing country markets.