TY - JOUR
T1 - To Debt or Not to Debt
T2 - Are Islamic Banks Less Risky than Conventional Banks?
AU - Sorwar, Ghulam
AU - Pappas, Vasileios
AU - Pereira, John
AU - Nurullah, Mohamed
PY - 2016/12
Y1 - 2016/12
N2 - We empirically analyze the market risk profiles of Islamic banks with two sets of conventional banks taken from the same geographical locations as Islamic banks and from a random global sample respectively for the period 2000-2013. Moreover, we divided our sample period into pre-financial crisis, during financial and post financial crisis. Estimates of Value-at-Risk (VaR) and Expected Shortfall (ES) which incorporates losses beyond VaR are used as market risk measures for both univariate and multivariate portfolios. Our key input is the share price by market capitalization of publicly traded banks of similar size in Islamic and non-Islamic countries. Univariate analysis finds no discernible differences between Islamic and conventional banks. However, dynamic correlations obtained via a multivariate setting shows Islamic banks to be less riskier for both sets of conventional banks; and especially so during the recent global financial crisis. The policy implications are: (i) that the inclusion of Islamic banks within asset portfolios may mitigate potential risk; (ii) that the Basel committee should consider the ES measure of risk for Islamic banks in preference to the current VaR methodology, which over-estimates the market risk of Islamic banks.
AB - We empirically analyze the market risk profiles of Islamic banks with two sets of conventional banks taken from the same geographical locations as Islamic banks and from a random global sample respectively for the period 2000-2013. Moreover, we divided our sample period into pre-financial crisis, during financial and post financial crisis. Estimates of Value-at-Risk (VaR) and Expected Shortfall (ES) which incorporates losses beyond VaR are used as market risk measures for both univariate and multivariate portfolios. Our key input is the share price by market capitalization of publicly traded banks of similar size in Islamic and non-Islamic countries. Univariate analysis finds no discernible differences between Islamic and conventional banks. However, dynamic correlations obtained via a multivariate setting shows Islamic banks to be less riskier for both sets of conventional banks; and especially so during the recent global financial crisis. The policy implications are: (i) that the inclusion of Islamic banks within asset portfolios may mitigate potential risk; (ii) that the Basel committee should consider the ES measure of risk for Islamic banks in preference to the current VaR methodology, which over-estimates the market risk of Islamic banks.
KW - Islamic finance
KW - Value at Risk
KW - Expected Shortfall
KW - Capital structure
UR - http://dx.doi.org/10.1016/j.jebo.2016.10.012
U2 - 10.1016/j.jebo.2016.10.012
DO - 10.1016/j.jebo.2016.10.012
M3 - Article
VL - 132
SP - 113
EP - 126
JO - Journal of Economic Behavior and Organization
JF - Journal of Economic Behavior and Organization
SN - 0167-2681
ER -