The dilemma of the sharia conscious investor: a time series analysis

The universe of sharia compliant equities is rather small and diversification benefits are limited for the sharia conscious investor. This paper attempts to investigate diversification potential among S&P mainstream sharia compliant indices in all six GCC Countries by employing time series techniques of cointegration, vector error correction model, variance decomposition, impulse response functions, and persistence profile. It further investigates if there is a diversification benefit between the S&P mainstream sharia indices (MSI) and sectoral sharia real estate in the region by the use of Engle Granger and Johansen techniques. If Islamic and Sharia indices are integrating; this leaves the sharia conscious investor with the dilemma of where to invest his wealth to gain diversification benefits. Theoretically, if a number of stock markets are found to be co-integrated, then the diversifications gains are lost, since all markets move together in the long run and become one market. To the best of our knowledge this is the first study to investigate diversification potential among MSI within the GCC region, and between MSI and sectorial sharia real estate indices. Evidence from the study indicates that the MSI in the GCC area are bound together by one co-integrating relationship with Bahrain Sharia being the leading index. The same result was found between the MSI and the sectoral sharia real estate indices, leaving the sharia conscious investor in the GCC region no option but to search for regional diversification or other sectoral indices for diversification benefit. Outcome of the study would be valuable for sharia conscious investors in particular and portfolio managers in general in setting their portfolio diversification strategies