Islamic, socially responsible, and conventional market comovements: Evidence from stock indices

• DOI: http://doi.org/10.1002/tie.22027
• Author: Josanco Floreani,Andrea Paltrinieri,Matthew C. Mitchell,Jeffrey A. Kappen,Kavilash Chawla
• Date: 01 September 2019
• Published date: 01 September 2019

RESEARCH ARTICLE

Islamic, socially responsible, and conventional market

comovements: Evidence from stock indices

Andrea Paltrinieri

1

| Josanco Floreani

1

| Jeffrey A. Kappen

2

| Matthew C. Mitchell

2

|

Kavilash Chawla

3

1

Department of Banking and Finance,

University of Udine, Udine, Italy

2

Department of International Business, Drake

University, Des Moines, Iowa

3

Baton Global, Des Moines, Iowa

Correspondence

Andrea Paltrinieri, Department of Banking and

Finance, University of Udine, Via Tomadini

30, Udine 33100, Italy.

Email: andrea.paltrinieri@uniud.it

JEL codes: G15, G11

This article extends the literature on ethical investment risks, correlations, and comovements.

Through a sample of 17 Islamic, socially responsible investment (SRI), and conventional stock

indices, we investigate cointegration and dynamic correlations for the period 2005–2015. We

also examine these stock indices’responses to two major economic factors, namely, oil prices

and market volatility. Our results show cointegration between Islamic, SRI and conventional

stock indices, and comovements with mutual causalities. During crises, dynamic correlations

tend to spike; however, quite a different pattern emerges during postcrisis periods when there

is more variability in conditional covariances. Finally, we provide evidence that all three types of

stock indices react positively to oil price changes, but negatively to global equity market volatil-

ity, albeit with different magnitudes. Overall, investors can obtain portfolio diversification bene-

fits through SRI and Islamic stock indices, particularly in postcrisis periods.

KEYWORDS

cointegration, DCC Garch, ethics, Islamic finance, Islamic stock indices, SRI

1|INTRODUCTION

Over the past 30 years, socially responsible investing (SRI) has

attracted increasing attention from practitioners, institutional inves-

tors, and academics. Compared to conventional investments, SRI

funds employ screens that include or exclude stocks using criteria that

are often combined with shareholder activism and/or the engagement

of local communities to influence corporate behavior (Renneboog,

Ter-Horst, & Zhang, 2008). While there is no generalized consensus

on what the term “SRI”means within the literature (Berry & Junkus,

2013), we will follow the Eurosif (2010) definition, “socially responsi-

ble investments combine investors' financial objectives with their con-

cerns about environmental, social and governance issues.”

More recently, Islamic finance has developed as another form of

ethical investment. An Islamic investment must conform to the princi-

ples of the Quran and the Shariah legal system that govern all aspects

of economic activity, including financial services, portfolio allocations,

trading practices, and dividend distributions. With an annual value

over US$2 trillion, Islamic finance has grown to be a substantial seg-

ment of the global financial market and has gained acceptance as an

efficient alternative model of intermediation (Dubai Islamic

Bank, 2017).

All forms of Islamic investment, including mutual funds and stock

indices, are created to fulfill religious obligations (Farook, 2007).

Under Shariah guidelines, Islamic investments must comply with two

basic conditions (Usmani, 2002): (a) no fixed returns can be promised,

(b) all securities included in portfolios must be Shariah compliant. To

build an Islamic equity portfolio, asset managers have to apply at least

negative screening that is, a company cannot be linked to alcohol,

tobacco, pork products, armaments, gambling, erotic products, or any

financial companies that use interest (El Gamal, 2011). Additionally,

stocks must follow several quantitative financial conditions, such as a

low company debt ratio, low cash holdings, and an extremely low

amount of income generated indirectly from interest.

Wilson (1997) showed the process for excluding companies

according to a set of ethical constraints is similar between SRI and

Islamic investors. Despite this, Forte and Miglietta (2011) found these

investors do not necessarily arrive at similar outcomes in terms of

asset allocations, econometric profiles, or sector exposures. Focusing

on mutual fund performance, Abdelsalam, Duyugun, Matallin, and

Tortosa-Ausina (2014a) showed in both Islamic and SRI mutual funds

exhibit performance persistence. Moreover, Abdelsalam, Duyugun,

Matallin, and Tortosa-Ausina (2014b) provided weak evidence that

the average efficiency of SRI mutual funds is slightly better than that

DOI: 10.1002/tie.22027

Thunderbird Int. Bus. Rev. 2019;61:719–733. wileyonlinelibrary.com/journal/tie © 2018 Wiley Periodicals, Inc. 719