IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/60248.html
   My bibliography  Save this paper

An inquiry into the stability of Islamic Financial Services Institutions in terms of volatility, risk and correlations: A case study of Malaysia employing M-GARCH t-DCC and MODWT Wavelet approaches

Author

Listed:
  • Kamaruzdin, Thaqif
  • Masih, Mansur

Abstract

Islamic Finance as an industry in recent times has been celebrated for its stability and resilience. With the philosophy of risk sharing and strict rules governing its activities to be in line with Islamic Law (the Shariah), the industry is seen as an alternative to the conventional finance with its tainted image of profit maximizing at any cost causing the Global Financial Crisis of 2008 - 2009. Given this claim it would be interesting to investigate the stability of the Islamic Financial Services Institutions (IFSIs) in comparison to the conventional sector. The Malaysian IFSIs were chosen as a case study as the Malaysia‟s Islamic Finance industry developed in the world with strict Shariah screening. As such, the Malaysian IFSIs are investigated to gain insights into their performance in terms of volatility and correlations with the market and then compared to their competitors by employing an M-GARCH t-DCC and also MODWT Wavelet technique to further dissect this volatility into their contributions from the point of view of different time scales. The findings are that IFSIs are much more volatile than their competitors with seemingly independent spikes in volatility unique to themselves but are low in correlation to the market implying that IFSIs volatility may be independent of the market due to assets that require the risk taking in order to justify earnings. IFSIs may need to cooperate in developing risk management standards and practices to mitigate risk that are unique to themselves as well as review the contracts and assets that may expose the IFSIs to too much risk.

Suggested Citation

  • Kamaruzdin, Thaqif & Masih, Mansur, 2014. "An inquiry into the stability of Islamic Financial Services Institutions in terms of volatility, risk and correlations: A case study of Malaysia employing M-GARCH t-DCC and MODWT Wavelet approaches," MPRA Paper 60248, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:60248
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/60248/1/MPRA_paper_60248.pdf
    File Function: original version
    Download Restriction: no

    References listed on IDEAS

    as
    1. Abbas Valadkhani & Charles Harvie & Indika Karunanayake, 2013. "Global output growth and volatility spillovers," Applied Economics, Taylor & Francis Journals, vol. 45(5), pages 637-649, February.
    2. Bacha, Obiyathulla I., 1997. "Adapting Mudarabah Financing to Contemporary Realities: A Proposed Financing Structure," MPRA Paper 12732, University Library of Munich, Germany, revised Nov 1996.
    3. You, Leyuan & Daigler, Robert T., 2010. "Is international diversification really beneficial?," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 163-173, January.
    4. Syllignakis, Manolis N. & Kouretas, Georgios P., 2011. "Dynamic correlation analysis of financial contagion: Evidence from the Central and Eastern European markets," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 717-732, October.
    5. Mara Madaleno & Carlos Pinho, 2012. "International stock market indices comovements: a new look," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 17(1), pages 89-102, January.
    6. Hammami, Yacine & Jilani, Faouzi & Oueslati, Abdelmonem, 2013. "Mutual fund performance in Tunisia: A multivariate GARCH approach," Research in International Business and Finance, Elsevier, vol. 29(C), pages 35-51.
    7. Gencay, Ramazan & Selcuk, Faruk & Whitcher, Brandon, 2005. "Multiscale systematic risk," Journal of International Money and Finance, Elsevier, vol. 24(1), pages 55-70, February.
    8. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    9. Khalfaoui Rabeh, K & Boutahar Mohamed, B, 2011. "A time-scale analysis of systematic risk: wavelet-based approach," MPRA Paper 31938, University Library of Munich, Germany.
    10. Nooraslinda Abdul Aris & Roszana Tapsir & Mohammad Kamil bin Abu Talib, 2012. "Risk And Risk Management Of Takaful Industry," Journal of Global Business and Economics, Global Research Agency, vol. 4(1), pages 29-39, January.
    11. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    12. Tamakoshi, Go & Hamori, Shigeyuki, 2014. "Co-movements among major European exchange rates: A multivariate time-varying asymmetric approach," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 105-113.
    13. Gjika, Dritan & Horváth, Roman, 2013. "Stock market comovements in Central Europe: Evidence from the asymmetric DCC model," Economic Modelling, Elsevier, vol. 33(C), pages 55-64.
    14. Beck, Thorsten & Demirgüç-Kunt, Asli & Merrouche, Ouarda, 2013. "Islamic vs. conventional banking: Business model, efficiency and stability," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 433-447.
    15. Fernandez, Viviana, 2006. "The CAPM and value at risk at different time-scales," International Review of Financial Analysis, Elsevier, vol. 15(3), pages 203-219.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Islamic Finance; Islamic Financial Services Institutions; Volatility; Risk; Correlation; Diversification; M-GARCH t-DCC and MODWT Wavelet;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G2 - Financial Economics - - Financial Institutions and Services

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:60248. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter). General contact details of provider: http://edirc.repec.org/data/vfmunde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.