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Hidden cointegration reveals hidden values in Islamic investments

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  • Alexakis, Christos
  • Pappas, Vasileios
  • Tsikouras, Alexandros

Abstract

We explore long-run relationships between Islamic and conventional equity indices for the period 2000–2014. We adopt a hidden co-integration technique to decompose the series into positive and negative components; thus allowing the investigation of the indices during upward and downward markets. We find evidence of bi-directional dynamics during upward, downward and some mixed market movements. However, after adding control variables to our models, only the relationship for the negative components retains its significance; indicating that the Islamic index is the least responsive during bad times. This highlights the robust nature of Islamic investments and a possible differentiated investor reaction to financial information during market downtrends. Implications for practitioners are highlighted in a case study.

Suggested Citation

  • Alexakis, Christos & Pappas, Vasileios & Tsikouras, Alexandros, 2017. "Hidden cointegration reveals hidden values in Islamic investments," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 46(C), pages 70-83.
  • Handle: RePEc:eee:intfin:v:46:y:2017:i:c:p:70-83
    DOI: 10.1016/j.intfin.2016.08.006
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    References listed on IDEAS

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