Do ‘Sin Stocks’ Deprive Islamic Stock Portfolios of Diversification? Some Insights from the Use of MGARCH-DCC

Nazrol Kamil Mustaffa Kamil (), Obiyathulla Bacha and Abul Masih
Additional contact information
Nazrol Kamil Mustaffa Kamil: 1International Centre for Education in Islamic Finance (INCEIF), 2International Islamic University Malaysia

Capital Markets Review, 2012, vol. 20, issue 1&2, 43-64

Abstract: There is this argument that Shari’ah compliant portfolios are at a disadvantage in terms of portfolio diversification given that the exclusion of ‘sin stocks’ shrinks the Islamic investor’s investment universe. This paper investigates first, whether there is empirical evidence to substantiate such a claim, and second, can something be done to alleviate this disadvantage. Our results show that there is statistical evidence that Islamic portfolios are deprived of some benefits of diversification, at the sector level. However, the empirical evidence does not permit us to generalise such a finding at the specific stock level. By analysing the temporal characteristics of correlations using MGARCH-DCC, we argue that Islamic portfolios can minimise loss of diversification benefit by adopting appropriate portfolio allocation strategies. In particular, market sentiment and commodity prices are two key variables that can drive portfolio allocation switching decisions. In short, while there is some evidence that investors of Shari’ah compliant portfolios are denied additional benefits of diversification, there are arguably avenues to mitigate such a disadvantage.

Keywords: Portfolio diversification; Shari’ah compliant portfolios; Islamic stocks; Islamic capital market; MGARCH; dynamic conditional correlation (DCC) (search for similar items in EconPapers)
JEL-codes: C1 G11 Z12 (search for similar items in EconPapers)
Date: 2012
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.mfa.com.my/wp-content/uploads/2013/12/CMR-Vol-20-Paper-3-2012.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mfa:journl:v:20:y:2012:i:1&2:p:43-64

Access Statistics for this article

Capital Markets Review is currently edited by Hooy Chee Wooi

More articles in Capital Markets Review from Malaysian Finance Association
Bibliographic data for series maintained by Capital Market Review ().