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Hidden cointegration reveals hidden values in Islamic investments

Christos Alexakis, Vasileios Pappas and Alexandros Tsikouras

Journal of International Financial Markets, Institutions and Money, 2017, vol. 46, issue C, 70-83

Abstract: We explore long-run relationships between Islamic and conventional equity indices for the period 2000–2014. We adopt a hidden co-integration technique to decompose the series into positive and negative components; thus allowing the investigation of the indices during upward and downward markets. We find evidence of bi-directional dynamics during upward, downward and some mixed market movements. However, after adding control variables to our models, only the relationship for the negative components retains its significance; indicating that the Islamic index is the least responsive during bad times. This highlights the robust nature of Islamic investments and a possible differentiated investor reaction to financial information during market downtrends. Implications for practitioners are highlighted in a case study.

Keywords: Islamic equity index; Hidden co-integration; Portfolio optimisation; Dow Jones (search for similar items in EconPapers)
Date: 2017
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