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.
|Journal||Journal of International Financial Markets, Institutions and Money|
|Early online date||22 Aug 2016|
|Publication status||Published - Jan 2017|
- Islamic equity index
- Hidden co-integration
- Portfolio optimisation
- Dow Jones