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

Thaqif Kamaruzdin and Abul Masih

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Islamic Finance; Islamic Financial Services Institutions; Volatility; Risk; Correlation; Diversification; M-GARCH t-DCC and MODWT Wavelet (search for similar items in EconPapers)
JEL-codes: C22 C58 E44 G2 (search for similar items in EconPapers)
Date: 2014-07-23
New Economics Papers: this item is included in nep-hme, nep-mac, nep-rmg and nep-sea
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