Tests of the different variants of the monetary model in a developing economy : Malaysian experience in the pre-and post-crisis periods.

This study examines the validity of four different variants of the monetary model of exchange rate determination for Malaysia covering both the pre- and post-crisis periods using the vector error-correction models. The findings demonstrate that for both periods, the variables used are cointegrated. Tests tend to suggest that of the four variants of monetary model, the sticky-price model holds in both periods and the flexible-price model holds only in the post-crisis period. The proportionality between the exchange rate and relative money does not hold in any period. The plotted actual and fitted exchange rates for both sub-samples show that the models are able to track the actual exchange rate trend quiet well

Interest Rate Changes and Islamic Stock Return with Wavelets: the Case of Indonesia

In a global economy, shocks affect many financial sectors including stock market through the discount factor of the cash flow model. As in the conventional stock market where global shocks play a significant role in influencing stock prices, it also occurs in the Islamic stocks. This paper investigates the linkage between interest rate and stock returns for Indonesia with the sample period from January 2005 to December 2012 in the time-frequency domain by using a number of cross-wavelet tools. The results reveal that the similar response of the Islamic and conventional equity finance to the global shock. In turn, the result depicts that the Islamic equity market is also sensitive to the monetary tools used in the conventional system. The results have useful implications for policy makers in the face of a global financial crisis to prevent the steep fall of stock market price by increasing or decreasing the interest rate. In other words, since interest rate changes have an impact in the stock market, harmonisation of monetary policies mainly in developed countries can contribute to a decrease in the contagion potential on the stock market

The Effect of Recent Financial Crisis over Global Portfolio Diversification Opportunities – Empirical Evidence A Comparative Multivariate GARCH-DCC, MODWT and Wavelet Correlation Analysis

The purpose of this paper is to analyze the possible portfolio diversification opportunities between Asian Islamic Market and other regions‟ Islamic Markets; namely USA, Europe and BRIC. This study makes the initial attempt to fill in the gaps of previous studies by focusing on the proxies of global Islamic markets - based on the 6 years‟ daily data, from 04/2008 to 03/2014 - to identify the correlations among those selected markets by employing the recent econometric methodologies such as MGARCH-DCC, MODWT and the Continuous Wavelet Transform (CWT). By utilizing the MGARCH-DCC, this paper tries to identify the strength of the correlation among the markets. On the other hand, to see the time-varying nature of these mentioned correlations, we utilized CWT. For robustness, we have applied MODWT methodology as well. The findings tend to indicate that the Asian investors have a better portfolio diversification opportunities with the US markets followed by the European markets. BRIC markets do not offer any portfolio diversification benefits, which may be explained partly by the fact that the Asian markets cover partially the same countries of BRIC markets, namely India and China. Considering the time horizon dimension, the results narrow down the portfolio diversification opportunities only to the short-term investment horizons. The very short-run investors (up to 8 days only) can benefit through portfolio diversification, especially in the USA and European markets. The above-mentioned results have policy implications for the Asian Islamic investors (e.g. Portfolio Management, Strategic Investment Management)

Combining Momentum, Value, and Quality for the Islamic Equity Portfolio: Multi-style Rotation Strategies using Augmented Black Litterman Factor Model

This study constructs active Islamic portfolios using a multi-style rotation strategy, derived from the three prominent styles, namely, momentum, value, and quality investing. We use the stocks that are consistently listed in the U.S. Dow Jones Islamic index for a sample period from 1996 to 2012. We also include two macroeconomic mimicking portfolios to capture the premiums of industrial production growth and inflation innovation, accommodating the economic regime shifts. Based on the information coefficients, we find the six-month momentum and the fractal measure as momentum factors; the enterprise yield (gross profit/TEV) and the book to market ratio as valuation factors; the gross profit to total assets, the return on capital, and the scaled total accruals as quality factors. We further construct active portfolios using the augmented Black Litterman (ABL) factor model to avoid the factor alignment problem, with the factor views predicted using Markov Switching VAR, MIDAS, and Bayesian Model Averaging. The out-of-sample performance of our portfolios can produce information ratios of 0.7 – 0.8 over the composite indices, and information ratios of 0.42 – 0.48 over the style indices, with the annualized alphas of 10 – 11%. Even when we put the constrained tracking error of 1% over the benchmark, our portfolios still produce information ratios of 0.9 – 1.2 before transaction costs, and 0.6 – 0.8 after transaction costs. We provide intuitive explanations for each premium changing over time, and suggest the promising strategy for Islamic equity investors to outperform the market

Combining Momentum, Value, and Quality for the Islamic Equity Portfolio: Multi-style Rotation Strategies using Augmented Black Litterman Factor Model

This study constructs active Islamic portfolios using a multi-style rotation strategy, derived from the three prominent styles, namely, momentum, value, and quality investing. We use the stocks that are consistently listed in the U.S. Dow Jones Islamic index for a sample period from 1996 to 2012. We also include two macroeconomic mimicking portfolios to capture the premiums of industrial production growth and inflation innovation, accommodating the economic regime shifts. Based on the information coefficients, we find the six-month momentum and the fractal measure as momentum factors; the enterprise yield (gross profit/TEV) and the book to market ratio as valuation factors; the gross profit to total assets, the return on capital, and the scaled total accruals as quality factors. We further construct active portfolios using the augmented Black Litterman (ABL) factor model to avoid the factor alignment problem, with the factor views predicted using Markov Switching VAR, MIDAS, and Bayesian Model Averaging. The out-of-sample performance of our portfolios can produce information ratios of 0.7 – 0.8 over the composite indices, and information ratios of 0.42 – 0.48 over the style indices, with the annualized alphas of 10 – 11%. Even when we put the constrained tracking error of 1% over the benchmark, our portfolios still produce information ratios of 0.9 – 1.2 before transaction costs, and 0.6 – 0.8 after transaction costs. We provide intuitive explanations for each premium changing over time, and suggest the promising strategy for Islamic equity investors to outperform the market

The Effect of Recent Financial Crisis over Global Portfolio Diversification Opportunities – Empirical Evidence A Comparative Multivariate GARCH-DCC, MODWT and Wavelet Correlation Analysis

The purpose of this paper is to analyze the possible portfolio diversification opportunities between Asian Islamic Market and other regions‟ Islamic Markets; namely USA, Europe and BRIC. This study makes the initial attempt to fill in the gaps of previous studies by focusing on the proxies of global Islamic markets - based on the 6 years‟ daily data, from 04/2008 to 03/2014 - to identify the correlations among those selected markets by employing the recent econometric methodologies such as MGARCH-DCC, MODWT and the Continuous Wavelet Transform (CWT). By utilizing the MGARCH-DCC, this paper tries to identify the strength of the correlation among the markets. On the other hand, to see the time-varying nature of these mentioned correlations, we utilized CWT. For robustness, we have applied MODWT methodology as well. The findings tend to indicate that the Asian investors have a better portfolio diversification opportunities with the US markets followed by the European markets. BRIC markets do not offer any portfolio diversification benefits, which may be explained partly by the fact that the Asian markets cover partially the same countries of BRIC markets, namely India and China. Considering the time horizon dimension, the results narrow down the portfolio diversification opportunities only to the short-term investment horizons. The very short-run investors (up to 8 days only) can benefit through portfolio diversification, especially in the USA and European markets. The above-mentioned results have policy implications for the Asian Islamic investors (e.g. Portfolio Management, Strategic Investment Management)

The Role of Islamic Asset Classes in the Diversified Portfolios: Mean Variance Spanning Test

This study investigates both conventional and Islamic investors’ problems as to whether the inclusion of Islamic and conventional asset classes may expand the frontier of their respective portfolios. Our sample covers the global U.S. portfolios and Malaysian portfolios with multiple asset classes, as well as the portfolios with a specific asset class in several regions. This study uses the recent mean-variance spanning test in multiple regimes, which not only accounts for tail risk but also identifies the source of value added (tangency portfolio or global minimum variance). For intra-asset allocation, our findings show that both Islamic and conventional fund managers of a specific asset class can benefit from conventional and Islamic asset classes, respectively, in several regimes. For inter-asset allocation, conventional institutional investors cannot obtain any value added from Islamic asset classes. On the contrary, the U.S. Islamic institutional investors can expand their tangency portfolio by investing in U.S. TIPSs and REITs, and reduce their global minimum variance by allocating on U.S. high-yield bonds. Moreover, the Malaysian Islamic institutional investors can obtain risk reduction by investing in conventional bonds only in the high term premium regime. For the remaining asset classes, the opportunity sets are sufficient for Islamic investors to invest complying with Shariah rules. We provide some policy implications for the global Islamic financial industry

The Role of Islamic Asset Classes in the Diversified Portfolios: Mean Variance Spanning Test

This study investigates both conventional and Islamic investors’ problems as to whether the inclusion of Islamic and conventional asset classes may expand the frontier of their respective portfolios. Our sample covers the global U.S. portfolios and Malaysian portfolios with multiple asset classes, as well as the portfolios with a specific asset class in several regions. This study uses the recent mean-variance spanning test in multiple regimes, which not only accounts for tail risk but also identifies the source of value added (tangency portfolio or global minimum variance). For intra-asset allocation, our findings show that both Islamic and conventional fund managers of a specific asset class can benefit from conventional and Islamic asset classes, respectively, in several regimes. For inter-asset allocation, conventional institutional investors cannot obtain any value added from Islamic asset classes. On the contrary, the U.S. Islamic institutional investors can expand their tangency portfolio by investing in U.S. TIPSs and REITs, and reduce their global minimum variance by allocating on U.S. high-yield bonds. Moreover, the Malaysian Islamic institutional investors can obtain risk reduction by investing in conventional bonds only in the high term premium regime. For the remaining asset classes, the opportunity sets are sufficient for Islamic investors to invest complying with Shariah rules. We provide some policy implications for the global Islamic financial industry

The Impact of Crude Oil Price on Macroeconomic Variables: New Evidence from Malaysia

An understanding of how volatilities of and correlations between crude oil and macroeconomic variables change over time including their directions and size is of crucial importance for both the domestic and international investors with a view to diversifying their portfolios for hedging against unforeseen risks. This paper is a humble attempt to add value to the existing literature by empirically testing for the ‘time-varying’ and ‘scale dependent’ correlations between selected commodities and selected macroeconomic variables taking Malaysia as a case study. Particularly, by incorporating the scale dependence, it is possible to identify unique portfolio diversification opportunities for different set of investors bearing different investment horizons or stock-holding periods. Our findings tend to suggest that there is a theoretical relationship between the selected macroeconomic variables and the selected commodities and that the crude oil, gold, KLCI, CPI, BLR and T-bill are exogenous but the corn, industrial production and M2 are endogenous. Consistent with these results, our analysis based on the application of Generalised variance decompositions (VDCs) tends to indicate that the gold commodity is the most exogenous variable that drives the other commodities and the Malaysian macroeconomic variables. Finally, the value added stemming from the findings of Continuous Wavelet Transformation (CWT) tends to indicate that an investor who has exposure in crude oil commodity and wants to invest in KLCI, industrial production and treasury bill in Malaysia, should not hold his/her portfolio for more than 8 months in order to obtain diversification benefit