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Are Islamic finance innovations enough for investors to escape from a financial downturn? Further evidence from portfolio simulations

Mohamed Arouri (), Hachmi Ben Ameur, Nabila Jawadi (), Fredj Jawadi () and Waël Louhichi ()
Additional contact information
Nabila Jawadi: IPAG Business School
Waël Louhichi: CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique

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Abstract: Does Islamic finance constitute a promising solution for the current global financial crisis and are Islamic financial innovations enough to reassure investors, stabilize financial systems and provide them with a means of escaping from financial downturns? This article addresses these questions while investigating the dynamics of Islamic and conventional stock prices over the last few years. In particular, we apply Multivariate Vector Autoregressive (VAR) tools to test the interaction between conventional and Islamic financial products, and implement the Granger causality test to specify the dependence orientation of feedback between Islamic and conventional stock prices. Our article differs from previous work on the topic in that it develops portfolio simulations to determine whether Islamic finance can supplant conventional finance by generating investment and diversification opportunities during periods of crisis. In addition, we develop optimal portfolio strategies and investment proportions for conventional and Islamic funds to ensure the best resource allocation. Our main findings are: (i) the impact of the current crisis on the Islamic finance industry is less marked than on conventional finance, (ii) investment in Islamic products generates high returns, (iii) portfolios that include Islamic products reduce systemic risk and generate significant diversification benefits, (iv) the US crisis has led to significant changes in resource allocation through changes in investment choices.

Keywords: Financial crisis; Portfolio simulations; Islamic finance (search for similar items in EconPapers)
Date: 2013
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00875595
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Published in Applied Economics, Taylor & Francis (Routledge), 2013, 45 (24), pp.3412-3420. ⟨10.1080/00036846.2012.707776⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00875595

DOI: 10.1080/00036846.2012.707776

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