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Is Islamic stock index secured against interest rate risk? Evidence from Wavelet analysis

Listed author(s):
  • Rahim, Yasmin Abd
  • Masih, Mansur

This research is motivated by the desire to see the difference on interest rate risk exposure between Islamic and conventional equity across different investment horizons using wavelet analysis. Seven types of interest rates were tested with FTSE Bursa Malaysia Hijrah Shariah Index and FTSE Bursa Malaysia KLCI Index using data ranging from 1st March 2007 till 31st December 2014. The exposure to interest rate risk for both indices was highest at longer term investment horizon which is between 256 to 512 days; followed by investment horizon between 64-128 days. However, short term investment horizon which is between 2-4 days and 4-8 days has the lowest exposure to interest rate risk. High correlations between indexes across investment horizons had been demonstrated empirically. Hence, the hypothesis that an application of Islamic ethical screen would ‘save’ Islamic finance from interest rate risk is not accepted.

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File URL: https://mpra.ub.uni-muenchen.de/65259/1/MPRA_paper_65259.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 65259.

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Date of creation: 25 Jun 2015
Handle: RePEc:pra:mprapa:65259
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  1. Hammoudeh, Shawkat & Mensi, Walid & Reboredo, Juan Carlos & Nguyen, Duc Khuong, 2014. "Dynamic dependence of the global Islamic equity index with global conventional equity market indices and risk factors," Pacific-Basin Finance Journal, Elsevier, vol. 30(C), pages 189-206.
  2. Shamsuddin, Abul, 2014. "Are Dow Jones Islamic equity indices exposed to interest rate risk?," Economic Modelling, Elsevier, vol. 39(C), pages 273-281.
  3. Dewandaru, Ginanjar & Bacha, Obiyathulla Ismath & Masih, A. Mansur M. & Masih, Rumi, 2015. "Risk-return characteristics of Islamic equity indices: Multi-timescales analysis," Journal of Multinational Financial Management, Elsevier, vol. 29(C), pages 115-138.
  4. Chong, Beng Soon & Liu, Ming-Hua, 2009. "Islamic banking: Interest-free or interest-based?," Pacific-Basin Finance Journal, Elsevier, vol. 17(1), pages 125-144, January.
  5. 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.
  6. Hassan, Abul & Antoniou, Antonios & Paudyal, D Krishna, 2005. "Impact Of Ethical Screening On Investment Performance: The Case Of The Dow Jones Islamic Index," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 12, pages 68-97.
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