Tempered stable models for Islamic finance asset management

Mahmoud Bekri, Young Shin (Aaron) Kim and Svetlozar (Zari) T. Rachev

International Journal of Islamic and Middle Eastern Finance and Management, 2014, vol. 7, issue 1, 37-60

Abstract: Purpose - – In Islamic finance (IF), the safety-first rule of investing (hifdh al mal) is held to be of utmost importance. In view of the instability in the global financial markets, the IF portfolio manager (mudharib) is committed, according toSharia, to make use of advanced models and reliable tools. This paper seeks to address these issues. Design/methodology/approach - – In this paper, the limitations of the standard models used in the IF industry are reviewed. Then, a framework was set forth for a reliable modeling of the IF markets, especially in extreme events and highly volatile periods. Based on the empirical evidence, the framework offers an improved tool to ameliorate the evaluation of Islamic stock market risk exposure and to reduce the costs of Islamic risk management. Findings - – Based on the empirical evidence, the framework offers an improved tool to ameliorate the evaluation of Islamic stock market risk exposure and to reduce the costs of Islamic risk management. Originality/value - – In IF, the portfolio manager –mudharib –according toSharia, should ensure the adequacy of the mathematical and statistical tools used to model and control portfolio risk. This task became more complicated because of the increase in risk, as measured via market volatility, during the financial crisis that began in the summer of 2007.Shariacondemns the portfolio manager who demonstrates negligence and may hold him accountable for losses for failing to select the proper analytical tools. AsShariaguidelines hold the safety-first principle of investing rule (hifdh al mal) to be of utmost importance, the portfolio manager should avoid speculative investments and strategies that would lead to significant losses during periods of high market volatility.

Keywords: GARCH; ARMA; Risk management in Islamic finance; Stable and tempered stable distributions; AVaR (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eme:imefmp:v:7:y:2014:i:1:p:37-60

DOI: 10.1108/IMEFM-10-2012-0096

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