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Are Islamic finance innovations enough for investors to escape from a financial downturn? Further evidence from portfolio simulations

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Listed:
  • M. E. Arouri
  • H. Ben Ameur
  • N. Jawadi
  • F. Jawadi
  • W. Louhichi

Abstract

Does Islamic finance constitute a promising solution for the current global financial crisis and are Islamic financial innovations enough to reassure investors, stabilize financial systems and provide them with a means of escaping from financial downturns? This article addresses these questions while investigating the dynamics of Islamic and conventional stock prices over the last few years. In particular, we apply Multivariate Vector Autoregressive (VAR) tools to test the interaction between conventional and Islamic financial products, and implement the Granger causality test to specify the dependence orientation of feedback between Islamic and conventional stock prices. Our article differs from previous work on the topic in that it develops portfolio simulations to determine whether Islamic finance can supplant conventional finance by generating investment and diversification opportunities during periods of crisis. In addition, we develop optimal portfolio strategies and investment proportions for conventional and Islamic funds to ensure the best resource allocation. Our main findings are: (i) the impact of the current crisis on the Islamic finance industry is less marked than on conventional finance, (ii) investment in Islamic products generates high returns, (iii) portfolios that include Islamic products reduce systemic risk and generate significant diversification benefits, (iv) the US crisis has led to significant changes in resource allocation through changes in investment choices.

Suggested Citation

  • M. E. Arouri & H. Ben Ameur & N. Jawadi & F. Jawadi & W. Louhichi, 2013. "Are Islamic finance innovations enough for investors to escape from a financial downturn? Further evidence from portfolio simulations," Applied Economics, Taylor & Francis Journals, vol. 45(24), pages 3412-3420, August.
  • Handle: RePEc:taf:applec:v:45:y:2013:i:24:p:3412-3420
    DOI: 10.1080/00036846.2012.707776
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    References listed on IDEAS

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    1. Elyès Jouini & Olivier Pastré, 2009. "La Finance Islamique - Une solution à la crise ?," Post-Print halshs-00701937, HAL.
    2. repec:dau:papers:123456789/1744 is not listed on IDEAS
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    Cited by:

    1. Uddin, Gazi Salah & Hernandez, Jose Areola & Shahzad, Syed Jawad Hussain & Yoon, Seong-Min, 2018. "Time-varying evidence of efficiency, decoupling, and diversification of conventional and Islamic stocks," International Review of Financial Analysis, Elsevier, vol. 56(C), pages 167-180.
    2. repec:eee:ecmode:v:67:y:2017:i:c:p:300-306 is not listed on IDEAS
    3. Fredj Jawadi & Abdoulkarim Idi Cheffou & Nabila Jawadi, 2016. "Can the Islamic bank be an emerging leader? A panel data causality analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 23(14), pages 991-994, September.
    4. repec:eee:quaeco:v:66:y:2017:i:c:p:212-224 is not listed on IDEAS
    5. Hooi Hooi Lean & Vinod Mishra & Russell Smyth, 2015. "Is investing in Islamic stocks profitable? Evidence from the Dow Jones Islamic market indexes," Monash Economics Working Papers 33-15, Monash University, Department of Economics.
    6. repec:ipg:wpaper:2013-035 is not listed on IDEAS
    7. Sensoy, Ahmet & Aras, Guler & Hacihasanoglu, Erk, 2015. "Predictability dynamics of Islamic and conventional equity markets," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 222-248.
    8. repec:ipg:wpaper:35 is not listed on IDEAS
    9. Philippe DESBRIERES, 2017. "L’investissement conforme à la Charia est-il socialement responsable ?,Is Shariah compliant investment socially responsible?," Working Papers CREGO 1171001, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
    10. Fakhfekh, Mohamed & Hachicha, Nejib & Jawadi, Fredj & Selmi, Nadhem & Idi Cheffou, Abdoulkarim, 2016. "Measuring volatility persistence for conventional and Islamic banks: An FI-EGARCH approach," Emerging Markets Review, Elsevier, vol. 27(C), pages 84-99.
    11. repec:eee:intfin:v:57:y:2018:i:c:p:1-16 is not listed on IDEAS
    12. repec:spr:fininn:v:1:y:2015:i:1:d:10.1186_s40854-015-0016-3 is not listed on IDEAS
    13. repec:eee:ecosys:v:42:y:2018:i:3:p:450-469 is not listed on IDEAS
    14. Ben Rejeb, Aymen & Arfaoui, Mongi, 2016. "Conventional and Islamic stock markets: what about financial performance?," MPRA Paper 73495, University Library of Munich, Germany.
    15. El khamlichi, Abdelbari & HOANG, Thi Hong Van & Wong, Wing-Keung, 2017. "Is Gold Different for Islamic and Conventional Portfolios? A Sectorial Analysis," MPRA Paper 76282, University Library of Munich, Germany.
    16. Fredj Jawadi & Abdoulkarim Idi Cheffou & Nabila Jawadi, 2016. "Do Islamic and Conventional Banks Really Differ? A Panel Data Statistical Analysis," Open Economies Review, Springer, vol. 27(2), pages 293-302, April.
    17. Umar, Zaghum, 2017. "Islamic vs conventional equities in a strategic asset allocation framework," Pacific-Basin Finance Journal, Elsevier, vol. 42(C), pages 1-10.
    18. Rangan Gupta & Shawkat Hammoudeh & Beatrice D. Simo-Kengne & Soodabeh Sarafrazi, 2014. "Can the Sharia-based Islamic stock market returns be forecasted using large number of predictors and models?," Applied Financial Economics, Taylor & Francis Journals, vol. 24(17), pages 1147-1157, September.
    19. Fredj Jawadi & Abdoulkarim Idi Cheffou & Nabila Jawadi & Wael Louhichi, 2016. "On the Reputation of Islamic Banks: a Panel Data Qualitative Econometrics Analysis," Open Economies Review, Springer, vol. 27(5), pages 987-998, November.
    20. Selim baha Yildiz & Abdelbari El khamlichi, 2017. "The Performance Ranking of Emerging Markets Islamic Indices Using Risk Adjusted Performance Measures," Economics Bulletin, AccessEcon, vol. 37(1), pages 63-78.
    21. Ajmi, Ahdi Noomen & Hammoudeh, Shawkat & Nguyen, Duc Khuong & Sarafrazi, Soodabeh, 2014. "How strong are the causal relationships between Islamic stock markets and conventional financial systems? Evidence from linear and nonlinear tests," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 213-227.
    22. Zaghum Umar & Tahir Suleman, 2017. "Asymmetric Return and Volatility Transmission in Conventional and Islamic Equities," Risks, MDPI, Open Access Journal, vol. 5(2), pages 1-18, March.
    23. repec:eee:pacfin:v:53:y:2019:i:c:p:133-144 is not listed on IDEAS
    24. repec:eee:pacfin:v:53:y:2019:i:c:p:484-496 is not listed on IDEAS
    25. repec:ipg:wpaper:2014-091 is not listed on IDEAS

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