Hidden Cointegration Reveals Hidden Values in Islamic Investments

Christos Alexakis, Vasileios Pappas, Alexandros Tsikouras

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We explore long-run relationships between Islamic and conventional equity indices for the period 2000-2014. We adopt a hidden co-integration technique to decompose the series into positive and negative components; thus allowing the investigation of the indices during upward and downward markets. We find evidence of bi-directional dynamics during upward, downward and some mixed market movements. However, after adding control variables to our models, only the relationship for the negative components retains its significance; indicating that the Islamic index is the least responsive during bad times. This highlights the robust nature of Islamic investments and a possible differentiated investor reaction to financial information during market downtrends. Implications for practitioners are highlighted in a case study.
Original languageEnglish
Pages (from-to)70-83
JournalJournal of International Financial Markets, Institutions and Money
Early online date22 Aug 2016
Publication statusPublished - Jan 2017


  • Islamic equity index
  • Hidden co-integration
  • Portfolio optimisation
  • Dow Jones


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