Islamic And Conventional Equity Indices: An Examination Of Cointegration And Hedging

Abstract

Linkages between the Islamic Stock Indices, the Indices of Europe, Asia, US, UK, and Japan, and those of the emerging markets are empirically analyzed. Using methodologies that account for idiosyncratic factors in the data, evidence of linkages are found between large stock markets of Europe, Asia, US, and UK. Emerging markets indices show clear insulation from the Islamic indices. Although, emerging markets follow the Islamic based investment approach, other aspects such as economic factors as well as the size of the industry have dissimilarities. Hence, strategies for hedging or diversification, particularly in the long-run can be developed. If emerging market indices are combined with the indices of other markets, there may be considerable risk reduction with such a strategy.