Volatility spillover, integration, and performance of Islamic and conventional equity markets

This study, which utilises data spanning from August 1, 2007, through May 5, 2023, explores the ambiguous relationship between Islamic Equity Markets (IEM) and Conventional Equity Markets (CEM) across three subperiods: (i) during the Global Financial Crisis (GFC); (iii) post-GFC and (iv) during the COVID-19. It analyses aspects, namely volatility, spillovers, integration and performance. While some research suggests IEM's outperformance due to Shariah principles, consensus in the literature is still lacking. Portfolio diversification is crucial for risk management and performance enhancement, prompting this study to examine the IEM's potential for innovative portfolio diversification and risk reduction. The study employs stratified random sampling with daily prices of 16 conventional and Islamic market indexes from ASEAN (Malaysia and Indonesia), GCC (Bahrain, Saudi Arabia and UAE), the USA, China and MSCI ACWI. Further, it engages ARIMA-EARCH, MGARCH-DCC, wavelet techniques, performance analysis of Jensen, Sharpe, as well as Treynor ratios and efficient frontier to address each objective. The study's key findings are as follows: (1) this study challenges the notion that IEM inherently has lower risk, as IEM and CEM were significantly impacted by the COVID-19 crisis; (2) dynamic integration between IEM and CEM, varying with investment horizons and market conditions; (3) inconsistent outperformance of IEM compared to CEM across countries and periods; (4) A mixed portfolio of IEM and CEM on the efficient frontier was found to offer higher returns with lower risk; (5) IEM exhibited slightly higher volatility compared to CEM, with Malaysian’s IEM and CEM exhibiting reduced correlations to countries’ indexes of Bahrain and the USA, thus recommending the exploitation of diversification benefits, emphasising a balanced approach that incorporates both short-term and long-term strategies aligned with individual financial goals. This thesis acknowledges limitations, suggesting that a more extensive comparative analysis beyond the regional focus and an exploration of macroeconomic factors would enhance its findings. Future studies should encompass cross-country comparative analyses to comprehend economic and cultural influences on equity markets. The research findings hold practical implications for improving portfolio diversification for investors, analysts, policymakers and market participants.

Text 125401 - Full Text.pdf Download (7MB) Text SPE 2024 11 - Declaration Form.pdf Restricted to Repository staff only Download (621kB) Text SPE 2024 11 - Full Text.pdf Restricted to Repository staff only Download (7MB) Official URL or Download Paper: http://ethesis.upm.edu.my/id/eprint/18877

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