Analysis of Islamic Stock Indices
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Date
2009-04-29T19:14:04Z
Authors
Mohammed, Ansarullah Ridwan
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Journal ISSN
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Publisher
University of Waterloo
Abstract
In this thesis, an attempt is made to build on the quantitative research in the field of Islamic Finance. Firstly, univariate modelling using special GARCH-type models is performed on both the FTSE All World and FTSE Shari'ah All World indices. The AR(1) + APARCH(1,1) model with standardized skewed student-t innovations provided the best overall fit and was the most successful at VaR modelling for long and short trading positions. A risk assessment is done using the Conditional Tail Expectation (CTE) risk measure which concluded that in short trading
positions the FTSE Shari'ah All World index was riskier than the FTSE All World index but, in long trading positions the results were not conclusive as to which is riskier. Secondly, under the Markowitz model of risk and return the performance of Islamic equity is compared to conventional equity using various Dow Jones indices. The results indicated that even though the Islamic portfolio is relatively less diversified than the conventional portfolio, due to several investment restrictions, the Shari'ah screening process excluded various industries whose absence resulted in risk reduction. As a result, the Islamic portfolio provided a basket of stocks with special and favourable risk characteristics. Lastly, copulas are used to model the dependency structure between the filtered returns of the FTSE All World and FTSE Shari'ah All World indices after fitting the AR(1) + APARCH(1,1) model with standardized skewed student-t innovations. The t copula outperformed the others and a demonstration of forecasting using the copula-extended model is done.
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Keywords
Islam, APARCH, Markowitz, Copula