Abstract
This study is an attempt to explore whether explicit Islamic
(Shar¯ı‘ah based) investment criteria have any impact on return and
volatility spillover from Islamic to conventional indexes and vice-versa.
It pertains to five selected emerging Asian markets i.e., China, India,
Indonesia, Malaysia and Pakistan. The return and volatility spillover has
been measured in this study using the spillover index approach introduced
by Diebold and Yilmaz (2012), built on the idea of Forecast Error Variance
(FEV) decomposition in the generalized Vector Autoregressive (VAR)
framework. The study finds that Islamic indexes are recipients of volatility
spillovers from conventional indexes both in the selected Muslim minority
countries (China and India) as also in countries where Muslims are in
majority (Indonesia and Pakistan). Moreover, during normal periods, mean
returns of conventional indexes in both categories of countries are better
than that of Islamic indexes. During crises, however, Islamic indexes
performed comparatively better than their conventional counterparts in
Indonesia and Pakistan (Muslims majority countries), thus providing
a diversification opportunity. Findings of this study have implications
for policy makers, fund managers and individual investors for better
understanding the diversification opportunities both in in normal business
environment and in crisis period. Moreover, faith-based investors and
portfolio managers may not get the desired benefit of diversification linked
to investing in Islamic assets alone; therefore, they should include other
classes of assets in their portfolios to mitigate risk.
Muhammad Azhar Khan, Ajid ur Rehman. (2018) Returns and Volatility Spillover between Islamic and Conventional Indexes: Evidence from Selected Emerging Asian Markets, Journal of Islamic Business and Management, Volume 8, Issue 2.
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