Hidden Cointegration Reveals Hidden Values in Islamic Investments

Christos Alexakis; Vasileios Pappas; Alexandros Tsikouras

doi:10.1016/j.intfin.2016.08.006

Hidden Cointegration Reveals Hidden Values in Islamic Investments

Christos Alexakis, Vasileios Pappas, Alexandros Tsikouras

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Abstract

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 language	English
Pages (from-to)	70-83
Journal	Journal of International Financial Markets, Institutions and Money
Volume	46
Early online date	22 Aug 2016
DOIs	https://doi.org/10.1016/j.intfin.2016.08.006
Publication status	Published - Jan 2017

Keywords

Islamic equity index
Hidden co-integration
Portfolio optimisation
Dow Jones

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10.1016/j.intfin.2016.08.006

Article_Hidden_13_July_2016_VPAccepted author manuscript, 1.04 MBLicence: CC BY-NC-ND

http://www.sciencedirect.com/science/article/pii/S1042443116300750

Cite this

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title = "Hidden Cointegration Reveals Hidden Values in Islamic Investments",

abstract = "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.",

keywords = "Islamic equity index , Hidden co-integration , Portfolio optimisation , Dow Jones",

author = "Christos Alexakis and Vasileios Pappas and Alexandros Tsikouras",

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doi = "10.1016/j.intfin.2016.08.006",

language = "English",

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T1 - Hidden Cointegration Reveals Hidden Values in Islamic Investments

AU - Alexakis, Christos

AU - Pappas, Vasileios

AU - Tsikouras, Alexandros

PY - 2017/1

Y1 - 2017/1

N2 - 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.

AB - 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.

KW - Islamic equity index

KW - Hidden co-integration

KW - Portfolio optimisation

KW - Dow Jones

UR - http://dx.doi.org/10.1016/j.intfin.2016.08.006

U2 - 10.1016/j.intfin.2016.08.006

DO - 10.1016/j.intfin.2016.08.006

M3 - Article

SN - 1042-4431

VL - 46

SP - 70

EP - 83

JO - Journal of International Financial Markets, Institutions and Money

JF - Journal of International Financial Markets, Institutions and Money

ER -

Hidden Cointegration Reveals Hidden Values in Islamic Investments

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