Hidden Cointegration Reveals Hidden Values in Islamic Investments

Christos Alexakis, Vasileios Pappas, Alexandros Tsikouras

OAI: oai:purehost.bath.ac.uk:publications/3221241b-9cc9-4698-9e00-9843feab8079 • DOI: https://doi.org/10.1016/j.intfin.2016.08.006

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.

Islamic equity index Hidden co-integration Portfolio optimisation Dow Jones