Comparative Efficiency, Asymmetric Integration And International Diversification Benefits: Insights From Islamic And Conventional Stock Markets

Abstract

The demand for the Islamic stock indices has increased as a result of their spectacular growth and less risky characteristics which makes them one of the major innovations in the financial community. Moreover, the Islamic stock indices are gaining the attention of all the investor classes such as Muslims and non-Muslims because the Islamic stock portfolios exhibit different performance than the conventional stock portfolios. However, the comparative efficiency, asymmetric integration and portfolio diversification benefits of the Islamic and conventional counterparts have remained unexplored.

Therefore, the objectives of the current thesis are to investigate and compare the efficiency of 12 Islamic and conventional stock markets by employing MultiFractal Detrended Fluctuation Analysis (MF-DFA) on daily stock returns data from January 1, 2003 to December 31, 2014. Further, it uses asymmetric cointegration tests on weekly stock prices to examine the asymmetric long and short term association between the Islamic and conventional stock markets. Finally, various risk and downside risk measures are used to assess the potential reduction in the risk of conventional stock-only portfolio by adding Islamic stock to it.