Mouna Boujelbène Abbes

Risk and Return of Islamic and Conventional Indices

This study examines the risk and the return characteristics of the Islamic market indices versus their conventional counterpart indices. For this purpose, a large international data of 35 indices combining developed, emerging and GCC markets over the period of Jun 2002 to April 2012 is used. The t test has been employed to investigate the mean returns difference between both types of indices. The results show that there is no significant difference in mean between Islamic and conventional indices except for Italy and Australia. The EGARCH estimation results reveal the presence of a leverage effect risk in all studied indices. The study of the risk adjusted performances of Islamic stock market indices versus their conventional counterpart indices using differences-in-Sharpe ratio test and the CAPM model show that in the entire period as well as in the crisis period there is no difference between performance the types of indices in risk adjusted return basis. Consequently, Muslim investors can pursue passive stock investments in conformity to their religious beliefs without sacrificing financial performance.

Subprime crisis and volatility spillover

The subprime financial crisis has sparked our interest in identifying channels through which US crisis spread across 20 developed and emerging stock markets. Empirical results of GARCH and EGARCH estimated models show a high persistence and asymmetric effect of volatility. Estimation of an augmented GARCH model indicates that the US current crisis spilled over American, European, Asian and Arabic financial markets. Interestingly, there are significant spillovers of volatility to Asian markets from UK and Swiss. Financial markets of Japan, Korea and especially Singapore constitute a channel through which crises are transmitted across global equity return.

Volatility spillovers and dynamic conditional correlation between crude oil and stock market returns

This paper investigates the volatility spillover and the dynamic correlation between crude oil and stock index returns. Monthly returns from January 1997 to December 2010 of the crude oil, oil-importing and oil-exporting stock indices are analysed using three multivariate GARCH specifications specifically the BEKK-GARCH model, the CCC-GARCH model and the DCC-GARCH model. Based on the BEKK-GARCH estimation results, we find strong evidence of volatility spillovers from crude oil to all oil-importing and oil-exporting stock markets. Based on the CCC model, the estimates of conditional correlations for returns across crude oil and market indexes are very low, which means the conditional shocks are correlated only in the same market. Though, the DCC estimates of the conditional correlations are always significant. This finding suggests that the assumption of constant conditional correlations is not supported empirically. The time varying correlations of crude oil and stocks returns do not differ for oil-importer or oil-exporter countries. Oil price shocks seem to have a significant impact on the relationship between oil and stock indices returns in world turmoil periods. The extent of the effect of the 2008 stock market crash on the correlation coefficients is significantly important than those of the previous financial crises.

Risk and inefficiency: Behavioral explanation through overconfidence in Islamic and conventional banks

Purpose The purpose of this paper is to conduct a behavioral analysis, through overconfidence, in order to understand how this cognitive bias could affect risk taking and inefficiency in Islamic and conventional banks operating in the MENA region. Design/methodology/approach To achieve the objective, the authors considered two overconfidence proxies, namely loan growth rate and net interest margin. Using the generalized method of moments method regressions for panel data, the authors found that the two overconfidence proxies have an effect on the risk exposure and consequently on the efficiency level of Islamic and conventional banks. Findings In general, overconfidence bias causes excessive risk taking and the degradation of the cost efficiency level. Moreover, these effects emerge with a delay of three to four years and have implications that are not too different for both types of banks. Originality/value The main motivation underlying this research study is the relatively new field of behavioral finance way in treating the topic of overconfidence. The particularity of the overconfidence bias topic is its assumption that financial decisions can be influenced by cognitive biases, ignoring the fact of a predetermined risk-return calculation.