Harvesting Islamic risk premium with long–short strategies: A time scale decomposition using the wavelet theory

Date01 January 2021
Published date01 January 2021
DOIhttp://doi.org/10.1002/ijfe.1797
RESEARCH ARTICLE
Harvesting Islamic risk premium with longshort strategies:
A time scale decomposition using the wavelet theory
Rida Ahroum | Boujemâa Achchab
Ecole Nationale des Sciences Appliquées
Berrechid (ENSAB), Morocco, Ecole
Superieure de Technologie de Berrechid
(ESTB), Berrechid, Morocco
Correspondence
Rida Ahroum, Ecole Nationale des
Sciences Appliquées Berrechid (ENSAB),
Morocco Ecole Superieure de Technologie
de Berrechid (ESTB), B. P:218 Berrechid,
Morocco.
Email: ahroum.reda@gmail.com
Abstract
The impact of the Islamic screening on the performance of stock and sukuk
investments is subject of a serious debate. The aim of this paper is to contribute
to the ongoing studies on Islamic markets by giving new insights about charac-
teristics of the Islamic risk premium. To attempt this objective, we adopt a risk
premia methodology using longshort strategies and a time scale decomposi-
tion to find out the scale and the intensity degree of this effect over time. Fur-
thermore, we consider the Islamic risk premium as a market factor. Wavelet
analysis results in Malaysia highlight the presence of the Islamic effect at low
frequency bands and a higher intensity among the corporate debt market. How-
ever, this approach's effectiveness is conditioned to the existence of Islamic and
conventional benchmarks.
KEYWORDS
Investment strategy, Islamic screening, risk premia, wavelet theory
JEL CLASSIFICATION
C02; C49; C51; D49; G11; G15
1|INTRODUCTION
Islamic finance is expanding rapidly worldwide and has
achieved 2004$ billion at the end of 2015 (Thomson,
2017). Muslim and nonMuslim investors are showing
an incremental interest in this young finance. However,
since its starts in 1970, several debates arose on its simi-
larities with the conventional finance. For instance, diver-
gence of opinions on to what level assets marked as
Islamic, respect the Sharia (Islamic law) principles.
Another concern is about the existence of an Islamic
effect affecting the performance of Islamic investments.
The origin of these debates comes from the fact that
Islamic finance imposes specific constraints on assets
such as the ban of interest, speculation, and some sectors
(Iqbal, 1997). Consequently, Islamic finance, widely
speaking, is supposed to be different from the conven-
tional one. However, this assumption is not verified
completely and systematically in practice (Habib, 2017;
Wilson, 2008).
Concerning the stock market, a stock is considered as
Islamic once it verified a set of criteria. This process is
called the screening and integrates qualitative and quanti-
tative filters (Abdul Rahman, Azlan Yahya, & Herry
Mohd Nasir, 2010; Derigs & Marzban, 2008; Mbengue,
2017). Qualitative screening is about verifying whether
the activity of the company is Sharia compliant. For this
type of screening, Sharia guidelines come directly from
AlQuran (The holy book in Islam, which contains the
word of God) and the Sunnah (a speech collection from
the prophet Muhammed,peace be upon him). On the
other hand, quantitative screening is based on financial
ratios with a threshold to respect. Because equity invest-
ment does not exist at the air of the prophet Muhammed
(peace be upon him), quantitative screening is mainly
based on Ijtihad (consensus) of Islamic scholars (Abdul
Received: 14 December 2017 Revised: 14 December 2018 Accepted: 13 September 2019
DOI: 10.1002/ijfe.1797
Int J Fin Econ. 2019;115. © 2019 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/ijfe 1
430 © 2019 John Wiley & Sons, Ltd. Int J Fin Econ. 2021;26:430444.wileyonlinelibrary.com/journal/ijfe

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