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Do changes in shariah screening methodology make islamic indices substitutes or complements? an application of MGARCH-DCC and markov switching analysis

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  • Mantai, Mohammed Mahmoud
  • Masih, Mansur

Abstract

Many studies have examined the portfolio diversification opportunity of the Shariah compliant indices returns and markets including Malaysia. For the case of Malaysia, most of the recent studies have found lesser possibilities of diversification due to the trading partnerships and regional market contingencies. However, in this study, we apply MGARCH-DCC and use the MS-AR technique, for the first time to the best of our knowledge, to investigate the impact of the newly introduced Shariah screening methodology taking the Malaysian shariah FTEM index as a case study together with other 5 Islamic indices to assess the extent of portfolio diversification particularly after the new change as well as to identify the periods of stable and high volatilities. The findings of this study are consistent with the recent findings of (Najeeb et.al (2015); Rahim and Masih (2016)) with regards to portfolio diversification despite recent changes in the Shariah screening methodology. Nonetheless, with regards to the regime change and the probability duration of FTEM, we found that the shift from the stable to volatile regime normally takes place after 9 weeks with the probability of staying in each regime 66 and 75 weeks respectively. Therefore, the new screening methodology has yet to shift Islamic indices from being a substitute to a complement. Finally, the findings of this paper may provide some insights to both Islamic equity investors and policy makers of the Islamic finance industry.

Suggested Citation

  • Mantai, Mohammed Mahmoud & Masih, Mansur, 2016. "Do changes in shariah screening methodology make islamic indices substitutes or complements? an application of MGARCH-DCC and markov switching analysis," MPRA Paper 72166, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:72166
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    References listed on IDEAS

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    1. Shamsuddin, Abul, 2014. "Are Dow Jones Islamic equity indices exposed to interest rate risk?," Economic Modelling, Elsevier, vol. 39(C), pages 273-281.
    2. Masih, Abul M. M. & Masih, Rumi, 1999. "Are Asian stock market fluctuations due mainly to intra-regional contagion effects? Evidence based on Asian emerging stock markets," Pacific-Basin Finance Journal, Elsevier, vol. 7(3-4), pages 251-282, August.
    3. Al-Khazali, Osamah & Lean, Hooi Hooi & Samet, Anis, 2014. "Do Islamic stock indexes outperform conventional stock indexes? A stochastic dominance approach," Pacific-Basin Finance Journal, Elsevier, vol. 28(C), pages 29-46.
    4. Rahim, Adam Mohamed & Masih, Mansur, 2016. "Portfolio diversification benefits of Islamic investors with their major trading partners: Evidence from Malaysia based on MGARCH-DCC and wavelet approaches," Economic Modelling, Elsevier, vol. 54(C), pages 425-438.
    5. Unggul Heriqbaldi, 2012. "Exchange Market Pressure in Indonesia: A Univariate Markov Switching Analysis," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 2(5), pages 603-616, September.
    6. Syed Faiq Najeeb & Obiyathulla Bacha & Mansur Masih, 2015. "Does Heterogeneity in Investment Horizons Affect Portfolio Diversification? Some Insights Using M-GARCH-DCC and Wavelet Correlation Analysis," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 51(1), pages 188-208, January.
    7. Aloui, Chaker & Hammoudeh, Shawkat & Hamida, Hela Ben, 2015. "Price discovery and regime shift behavior in the relationship between sharia stocks and sukuk: A two-state Markov switching analysis," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 121-135.
    8. Aloui, Chaker & Hkiri, Besma, 2014. "Co-movements of GCC emerging stock markets: New evidence from wavelet coherence analysis," Economic Modelling, Elsevier, vol. 36(C), pages 421-431.
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    Cited by:

    1. Abdullah Muhammad Ahmed Ayedh & Muhammad Iqmal Hisham Kamaruddin & Amir Shaharuddin, 2019. "Challenging the Current Shariah Screening Methodology Assessments in Kuala Lumpur Shariah Index (KLSI)," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 9(4), pages 253-268, October.

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    More about this item

    Keywords

    Shariah; Screening Methodology; Islamic Indices; MGARCH-DCC; Markov Switching;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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