Сравнительный анализ устойчивости традиционных и исламских фондовых рынков / Comparative analysis of the resilience of conventional and Islamic stock markets
Аннотация
Since the advent of Islamic brokerage companies in 1994 in Malaysia and later in Kuwait, Islamic stock markets have grown considerably. Islamic financial assets reached a total value of $2.44 trillion in 2019, while the average annual asset growth rate is 11.4%. The rapid development of the Islamic financial market stems from the existence of Shariah principles, which enable the investment of financial assets following moral principles.
The current research identifies the core principles of Islamic stock markets. First, the prohibition on the application of interest rate («riba»). A consequence of the prohibition of riba is the prohibition to open short positions since the latter involve lending of assets. The effect from interest rate prohibition is to substitute traditional bonds for sukuk (the equivalent of sharia-compliant bonds). Second, the prohibition of speculative behaviour, «maysir». Speculation includes transactions in risky financial instruments, namely derivatives and cryptocurrencies. Third, tobacco, alcohol, weapons, and other items detrimental to human health and life are forbidden for investment and trading. It is argued that these principles reduce investment risk, so investors may consider these protective features of these assets in times of economic uncertainty and geopolitical shocks. Consequently, the relevance of the current research is supported by the importance of international portfolio diversification in response to geopolitical shocks and economic uncertainty.
Besides, the literature on the response of Islamic and traditional stock markets to economic uncertainty and geopolitical risks focuses on the interaction among common risk indices, disregarding the interactions across GPR components. Furthermore, the literature focuses on the current values of exogenous shock indices, whereas large economic shocks spread over time and hence their effects have to be measured using lags. Consequently, the aspect of spillover effects between Islamic and traditional markets in response to geopolitical shocks and economic uncertainty remains a puzzle, which confirms the relevance of the current study.
The research objective is to assess the resilience of Shariah and conventional stock markets to exogenous shocks to obtain portfolio implications for investors and policy makers. To achieve the purpose, the author solves the following tasks:
- to define distinguishing Islamic financial system compared to conventional financial institutions;
- to identify the main measures of exogenous shocks;
- to build cross-quantilograms;
- to check the robustness of the model;
- to determine possible limitations of the applicability of the model;
- to make recommendations for investors and policy makers
The object of the thesis is conventional and Islamic stock markets, while the subject are the exogenous shocks determining the stock market performance.
The following steps are applied to estimate the response of stock market indices to exogenous shocks. First, the author constructs cointegration equations to assess whether cointegration relationships between variables exist. Second, the author estimates the significance of the effects of GPR, GEPU, GPR acts and GPR broad on stock indices using Vector Error Correction Model (VECM). Third, the author constructs an impulse response function which quantifies the impact of exogenous shocks on DJIM of S&P 500, S&P Asia, S&P Europe. The author applies a cross-quantilogram (CQ) approach to estimate the spillover effects of exogenous shocks on conventional and Islamic stock markets.
The author employs the S&P Global database to collect data from conventional stock markets (S&P Europe 350, S&P Asia 50, S&P 500), while the Dow Jones Islamic Market Index is used as the Islamic stock market index. The author applies the Geopolitical Risk Index (GPR), and its sub-indices GPR broad and GPR acts developed by Caldara & Iacoviello (2018), as a measure of political exogenous shocks. As economic exogenous shocks, the global economic uncertainty index (GEPU) developed by Baker (2016).
The current study attempts to test several hypotheses. Hypothesis 1: Islamic indices are safe-haven assets during financial crises and geopolitical turmoil, due to Quranic restrictions on speculation. Hypothesis 2: the response of the indices will be different at distinct time frames. Hypothesis 3: during geopolitical shocks will be observed spillover effects from risk-on assets to less risky assets.
The current study reveals several interesting results. First, a positive spillover effect on the returns of the Shariah stock market in the bullish market at the highest quantiles of GPR in long memory is observed. GPR broad at the lowest quantiles spurs returns on the DJIM index at the bear market in the short term. In contrast to medium to higher quantiles of GEPU, where a negative spillover effect is found in medium memory. However, GEPU encourages Shariah market returns in the bear market in the long term at the extreme quantiles of GEPU.
Second, the empirical results suggest that from the middle to the highest quantiles, GEPU provides a negative spillover effect on the S&P 500 and S&P Asia in the medium memory and bearish state of the market, while GEPU spurs S&P Europe returns. Over the longer term, at the highest GEPU quantiles, economic and political uncertainty contribute to returns of the S&P 500 and S&P Asia at bearish and bullish market conditions, respectively.
Third, the spillover effect from GPR to S&P 500 is positive at the bullish state of the market, while the response of S&P Asia to GPR is negative at the bearish state of the market. The author observes a positive spillover effect from GPR broad at the lowest quantiles to S&P 500 and S&P Europe at the bearish and bullish states of the market respectively. Consequently, the current paper evidence that, in the long term, the Dow Jones Islamic Index and the benchmark S&P 500 index are a safe haven for investors in response to global economic uncertainty and geopolitical shocks, while the European and Asian markets are less resilient to exogenous shocks. Besides, the S&P 500 and the Islamic index exhibit an identical response to exogenous shocks, which supports the defensive properties of these assets.
Based on the results, the author identifies several portfolio implications for individual and institutional investors. First, the empirical results indicate the direction of spillover effects in Islamic and conventional equity markets in response to economic uncertainty and geopolitical shocks. Investors may decide considering the response of Islamic and conventional markets to GPR, GPR broad, GPR act, GEPU. Second, individual, and institutional investors may rebalance their investment portfolios given the protective properties of US and Islamic assets.
The current research identifies the core principles of Islamic stock markets. First, the prohibition on the application of interest rate («riba»). A consequence of the prohibition of riba is the prohibition to open short positions since the latter involve lending of assets. The effect from interest rate prohibition is to substitute traditional bonds for sukuk (the equivalent of sharia-compliant bonds). Second, the prohibition of speculative behaviour, «maysir». Speculation includes transactions in risky financial instruments, namely derivatives and cryptocurrencies. Third, tobacco, alcohol, weapons, and other items detrimental to human health and life are forbidden for investment and trading. It is argued that these principles reduce investment risk, so investors may consider these protective features of these assets in times of economic uncertainty and geopolitical shocks. Consequently, the relevance of the current research is supported by the importance of international portfolio diversification in response to geopolitical shocks and economic uncertainty.
Besides, the literature on the response of Islamic and traditional stock markets to economic uncertainty and geopolitical risks focuses on the interaction among common risk indices, disregarding the interactions across GPR components. Furthermore, the literature focuses on the current values of exogenous shock indices, whereas large economic shocks spread over time and hence their effects have to be measured using lags. Consequently, the aspect of spillover effects between Islamic and traditional markets in response to geopolitical shocks and economic uncertainty remains a puzzle, which confirms the relevance of the current study.
The research objective is to assess the resilience of Shariah and conventional stock markets to exogenous shocks to obtain portfolio implications for investors and policy makers. To achieve the purpose, the author solves the following tasks:
- to define distinguishing Islamic financial system compared to conventional financial institutions;
- to identify the main measures of exogenous shocks;
- to build cross-quantilograms;
- to check the robustness of the model;
- to determine possible limitations of the applicability of the model;
- to make recommendations for investors and policy makers
The object of the thesis is conventional and Islamic stock markets, while the subject are the exogenous shocks determining the stock market performance.
The following steps are applied to estimate the response of stock market indices to exogenous shocks. First, the author constructs cointegration equations to assess whether cointegration relationships between variables exist. Second, the author estimates the significance of the effects of GPR, GEPU, GPR acts and GPR broad on stock indices using Vector Error Correction Model (VECM). Third, the author constructs an impulse response function which quantifies the impact of exogenous shocks on DJIM of S&P 500, S&P Asia, S&P Europe. The author applies a cross-quantilogram (CQ) approach to estimate the spillover effects of exogenous shocks on conventional and Islamic stock markets.
The author employs the S&P Global database to collect data from conventional stock markets (S&P Europe 350, S&P Asia 50, S&P 500), while the Dow Jones Islamic Market Index is used as the Islamic stock market index. The author applies the Geopolitical Risk Index (GPR), and its sub-indices GPR broad and GPR acts developed by Caldara & Iacoviello (2018), as a measure of political exogenous shocks. As economic exogenous shocks, the global economic uncertainty index (GEPU) developed by Baker (2016).
The current study attempts to test several hypotheses. Hypothesis 1: Islamic indices are safe-haven assets during financial crises and geopolitical turmoil, due to Quranic restrictions on speculation. Hypothesis 2: the response of the indices will be different at distinct time frames. Hypothesis 3: during geopolitical shocks will be observed spillover effects from risk-on assets to less risky assets.
The current study reveals several interesting results. First, a positive spillover effect on the returns of the Shariah stock market in the bullish market at the highest quantiles of GPR in long memory is observed. GPR broad at the lowest quantiles spurs returns on the DJIM index at the bear market in the short term. In contrast to medium to higher quantiles of GEPU, where a negative spillover effect is found in medium memory. However, GEPU encourages Shariah market returns in the bear market in the long term at the extreme quantiles of GEPU.
Second, the empirical results suggest that from the middle to the highest quantiles, GEPU provides a negative spillover effect on the S&P 500 and S&P Asia in the medium memory and bearish state of the market, while GEPU spurs S&P Europe returns. Over the longer term, at the highest GEPU quantiles, economic and political uncertainty contribute to returns of the S&P 500 and S&P Asia at bearish and bullish market conditions, respectively.
Third, the spillover effect from GPR to S&P 500 is positive at the bullish state of the market, while the response of S&P Asia to GPR is negative at the bearish state of the market. The author observes a positive spillover effect from GPR broad at the lowest quantiles to S&P 500 and S&P Europe at the bearish and bullish states of the market respectively. Consequently, the current paper evidence that, in the long term, the Dow Jones Islamic Index and the benchmark S&P 500 index are a safe haven for investors in response to global economic uncertainty and geopolitical shocks, while the European and Asian markets are less resilient to exogenous shocks. Besides, the S&P 500 and the Islamic index exhibit an identical response to exogenous shocks, which supports the defensive properties of these assets.
Based on the results, the author identifies several portfolio implications for individual and institutional investors. First, the empirical results indicate the direction of spillover effects in Islamic and conventional equity markets in response to economic uncertainty and geopolitical shocks. Investors may decide considering the response of Islamic and conventional markets to GPR, GPR broad, GPR act, GEPU. Second, individual, and institutional investors may rebalance their investment portfolios given the protective properties of US and Islamic assets.