Dynamic Volatility persistence of Islamic Equity Mutual Fund of Islamic Funds Markets

Main Article Content

Ghulam Nabi
Ramiz Ur Rehman
Rizwan Ali

Abstract

This study examines the volatility of returns of equity funds in developing Islamic markets. The study aims to determine whether and to what extent equity fund returns volatility structure has persistent characteristics and asymmetries in Saudi equities, Malaysian equities, and Pakistani equity funds from 2010 to 2022. To examine volatility dynamics, this study uses different GARCH variants for symmetric and asymmetric volatility behaviours. A News Impact Curve is used in this report to analyze the asymmetries in the volatility of investment returns and the relative value of equity funds markets across the various countries included in the study. Based on the study's results, daily returns exhibit persistent volatility. Still, weekly and monthly returns are unsuitable for the GARCH family, as the ARCH effect could not be found in less frequent data and does not appear to have persistent volatility. Daily returns also show asymmetries, indicating that investors' perceptions and actions are affected directly by news arriving consistently in the market. In contrast, the spectacle recedes with extended periods, suggesting that the emerging Islamic market can behave semi-strongly during prolonged periods. These findings impact investing in assets, pricing instruments, estimating the cost of capital, and optimizing portfolios.

Article Details

How to Cite
Nabi, G., Rameez Ur Rehman, & Rizwan Ali. (2023). Dynamic Volatility persistence of Islamic Equity Mutual Fund of Islamic Funds Markets . Pakistan Journal of Multidisciplinary Research, 4(1), 34-65. Retrieved from https://pjmr.org/pjmr/article/view/342
Section
Articles
Author Biographies

Ramiz Ur Rehman, Lahore Business School, The Lahore University

Dr Rameez ur Rehman is an associate professor at Lahore Business School, The Lahore University.

Rizwan Ali, Lahore Business School, The Lahore University

Dr Rizwan Ali is an associate professor at Lahore Business School, The Lahore University.

References

Ajmi, A. N., Hammoudeh, S., Nguyen, D. K., & Sarafrazi, S. (2014). How strong are the causal relationships between Islamic stock markets and conventional financial systems? Evidence from linear and nonlinear tests. Journal of International Financial Markets, Institutions and Money, 28, 213-227.

Aloui, C., Hammoudeh, S., & ben Hamida, H. (2015). Global factors driving structural changes in the co-movement between sharia stocks and sukuk in the Gulf Cooperation Council countries. The North American Journal of Economics and Finance, 31, 311-329.

Aloui, C., Hammoudeh, S., & Hamida, H. B. (2015). Co-movement between sharia stocks and sukuk in the GCC markets: A time-frequency analysis. Journal of International Financial Markets, Institutions and Money, 34, 69-79.

Al-Zoubi, H. A., & Maghyereh, A. I. (2007). The relative risk performance of Islamic finance: a new guide to less risky investments. International Journal of Theoretical and Applied Finance, 10(02), 235-249.

Balc?lar, M., Demirer, R., & Hammoudeh, S. (2015). Global risk exposures and industry diversification with Shariah-compliant equity sectors. Pacific-Basin Finance Journal, 35, 499-520.

Bayraktar, N. (2014). Measuring relative development level of stock markets: Capacity and effort of countries. Borsa Istanbul Review, 14(2), 74-95.

Bekri, M., & Kim, Y. S. A. (2015). Tail risk analysis of the S&P/OIC COMCEC 50 index. Borsa Istanbul Review, 15(1), 1-16.

Bollerslev, T. (1986). Generalized autoregressive conditional heteroskedasticity. Journal of econometrics, 31(3), 307-327.

Bollerslev, T. (1986). Generalized autoregressive conditional heteroskedasticity. Journal of econometrics, 31(3), 307-327.

Busse, J. A. (1999). Volatility Timing in Mutual Funds: Evidence from Daily Returns (Vol. 12, Issue 5). Winter. https://www.jstor.org/stable/2645974

Canepa, A., & Ibnrubbian, A. (2014). Does faith move stock markets? Evidence from Saudi Arabia. Quarterly Review of Economics and Finance, 54(4), 538–550. https://doi.org/10.1016/j.qref.2014.04.002

Cederburg, S., O'Doherty, M. S., Wang, F., & Yan, X. (Sterling). (2020). On the performance of volatility-managed portfolios. Journal of Financial Economics, 138(1), 95–117. https://doi.org/10.1016/j.jfineco.2020.04.015

Charfeddine, L., & Al Refai, H. (2019). Political tensions, stock market dependence and volatility spillover: Evidence from the recent intra-GCC crises. North American Journal of Economics and Finance, 50(July), 101032. https://doi.org/10.1016/j.najef.2019.101032

Chiadmi, M. S., & Ghaiti, F. (2012). Modeling volatility stock market using the ARCH and GARCH models: Comparative study between an Islamic and a conventional index (SP Sharia VS SP 500). International Research Journal of Finance and Economics, 91, 138-146.

Clements, A., & Silvennoinen, A. (2013). Volatility timing: How best to forecast portfolio exposures. Journal of Empirical Finance, 24, 108–115. https://doi.org/10.1016/j.jempfin.2013.09.004

Dewandaru, G., Rizvi, S. A. R., Masih, R., Masih, M., & Alhabshi, S. O. (2014). Stock market co-movements: Islamic versus conventional equity indices with multi-timescales analysis. Economic Systems, 38(4), 553-571.

Dewandaru, G., Bacha, O. I., Masih, A. M. M., & Masih, R. (2015). Risk-return characteristics of Islamic equity indices: Multi-timescales analysis. Journal of Multinational Financial Management, 29, 115-138.

El Alaoui, A. O., Bacha, O. I., Masih, M., & Asutay, M. (2016). Shari'ah screening, market risk and contagion: A multi-country analysis. Journal of Economic Behavior & Organization, 132, 93-112.

Engle, R. F. (1982). Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica: Journal of the econometric society, 987-1007.

Fakhfekh, M., Hachicha, N., Jawadi, F., Selmi, N., & Idi Cheffou, A. (2016). Measuring volatility persistence for conventional and Islamic banks: An FI-EGARCH approach. Emerging Markets Review, 27, 84–99. https://doi.org/10.1016/j.ememar.2016.03.004

Fama, E. F., & French, K. R. (2014). A five-factor asset pricing model $ Asset pricing model Factor model Dividend discount model Profitability Investment. https://doi.org/10.1016/j.jfineco.2014.10.010

Fama, E. F., & French, K. R. (2015). A five-factor asset pricing model $. 116, 1–22. https://doi.org/10.1016/j.jfineco.2014.10.010

Fenner, R. G., Han, Y., & Huang, Z. (2020). Idiosyncratic volatility shocks, behavior bias, and cross-sectional stock returns. The Quarterly Review of Economics and Finance, 75, 276-293.

Ferson, W., & Mo, H. (2016). Performance measurement with selectivity, market and volatility timing. Journal of Financial Economics, 121(1), 93–110. https://doi.org/10.1016/j.jfineco.2016.02.012

Fleming, J., Kirby, C., & Ostdiek, B. (2003). The economic value of volatility timing using "'realized'" volatility $. In Journal of Financial Economics (Vol. 67).

Foran, J., & Sullivan, N. O. (2017). Mutual fund skill in timing market volatility and liquidity. September 2016, 257–273. https://doi.org/10.1002/ijfe.1580

Giambona, E., & Golec, J. (2009). Mutual fund volatility timing and management fees. Journal of Banking and Finance, 33(4), 589–599. https://doi.org/10.1016/j.jbankfin.2008.12.005

Glosten, L. R., Jagannathan, R., & Runkle, D. E. (1993). On the relation between the expected value and the volatility of the nominal excess return on stocks. The journal of finance, 48(5), 1779-1801.

Guyot, A. (2011). Efficiency and dynamics of Islamic investment: evidence of geopolitical effects on Dow Jones Islamic market indexes. Emerging Markets Finance and Trade, 47(6), 24-45.

Hammoudeh, S., Mensi, W., Reboredo, J. C., & Nguyen, D. K. (2014). Dynamic dependence of the global Islamic equity index with global conventional equity market indices and risk factors. Pacific-Basin Finance Journal, 30, 189-206.

Jawadi, F., Jawadi, N., & Louhichi, W. (2014). Conventional and Islamic stock price performance: An empirical investigation. International Economics, 137, 73-87.

Jawadi, F., Idi Cheffou, A., Jawadi, N., & Ben Ameur, H. (2021). Conventional and Islamic stock market liquidity and volatility during COVID 19. Applied Economics, 53(60), 6944–6963. https://doi.org/10.1080/00036846.2021.1954595

Jebran, K., Chen, S., & Tauni, M. Z. (2017). Islamic and conventional equity index co-movement and volatility transmission: Evidence from Pakistan. Future Business Journal, 3(2), 98–106. https://doi.org/10.1016/j.fbj.2017.05.001

Jordan, B. D., & Riley, T. B. (2015). Volatility and mutual fund manager skill. Journal of Financial Economics, 118(2), 289–298. https://doi.org/10.1016/j.jfineco.2015.06.012

Khan, A. P., Kabir, S. H., Bashar, O. K., & Masih, A. M. M. (2015). Time varying correlation between Islamic equity and commodity returns: Implications for portfolio diversification. The Journal of Developing Areas, 49(5), 115-128.

Kim, S., & In, F. (2012). False discoveries in volatility timing of mutual funds. Journal of Banking and Finance, 36(7), 2083–2094. https://doi.org/10.1016/j.jbankfin.2012.03.014

Mahmud, M., & Mirza, N. (2011). An evaluation of mutual fund performance in an emerging economy: The case of Pakistan. The Lahore journal of economics, 16, 301.

Majdoub, J., Mansour, W., & Jouini, J. (2016). Market integration between conventional and Islamic stock prices. North American Journal of Economics and Finance, 37, 436–457. https://doi.org/10.1016/j.najef.2016.03.004

Mansor, F., & Bhatti, M. I. (2011). Risk and Return Analysis on Performance of the Islamic mutual funds?: Evidence from Malaysia. Global Economy and Finance Journal, 4(1), 19–31.

Mensi, W., Hammoudeh, S., Reboredo, J. C., & Nguyen, D. K. (2015). Are Sharia stocks, gold and U.S. Treasury hedges and/or safe havens for the oil-based GCC markets? Emerging Markets Review, 24, 101–121. https://doi.org/10.1016/j.ememar.2015.05.007

Merdad, H. J., Kabir Hassan, M., & Hippler, W. J. (2015). The Islamic risk factor in expected stock returns: An empirical study in Saudi Arabia. Pacific Basin Finance Journal, 34, 293–314. https://doi.org/10.1016/j.pacfin.2015.04.001

Mirza, N., Rahat, B., & Reddy, K. (2015). Business dynamics, efficiency, asset quality and stability: The case of financial intermediaries in Pakistan. Economic Modelling, 46, 358–363. https://doi.org/10.1016/j.econmod.2015.02.006

Mirza, N., Abbas Rizvi, S. K., Saba, I., Naqvi, B., & Yarovaya, L. (2022). The resilience of Islamic equity funds during COVID-19: Evidence from risk adjusted performance, investment styles and volatility timing. International Review of Economics and Finance, 77(September 2021), 276–295. https://doi.org/10.1016/j.iref.2021.09.019

Moreira, A., & Muir, T. (2017). Volatility?managed portfolios. The Journal of Finance, 72(4), 1611-1644.

Naifar, N., & Hammoudeh, S. (2016). Do global financial distress and uncertainties impact GCC and global sukuk return dynamics?. Pacific-Basin Finance Journal, 39, 57-69.

Najeeb, S. F., Bacha, O., & Masih, M. (2017). Does a held-to-maturity strategy impede effective portfolio diversification for Islamic bond (sukuk) portfolios? A multi-scale continuous wavelet correlation analysis. Emerging Markets Finance and Trade, 53(10), 2377-2393.

Naqvi, B., Mirza, N., Naqvi, W. A., & Rizvi, S. K. A. (2017). Portfolio optimization with higher moments of risk at the Pakistan Stock Exchange. Economic research-Ekonomska istraživanja, 30(1), 1594-1610.

Nelson, D. B. (1991). Conditional heteroskedasticity in asset returns: A new approach. Econometrica: Journal of the econometric society, 347-370.

Novy-Marx, R. (2014). Understanding defensive equity (No. w20591). National Bureau of Economic Research.

Pagan, A. R., & Schwert, G. W. (1990). Alternative models for conditional stock volatility. Journal of econometrics, 45(1-2), 267-290.

Rizvi, S. K. A., & Naqvi, B. (2009). Asymmetric behavior of inflation uncertainty and friedman-ball hypothesis: evidence from pakistan. In 26th International Symposium on Money, Banking and Finance, Orléans, France.

Rizvi, S. A. R., Arshad, S., & Alam, N. (2015). Crises and contagion in Asia Pacific—Islamic v/s conventional markets. Pacific-Basin Finance Journal, 34, 315-326.

Rizvi, S. K. A., Mirza, N., Naqvi, B., & Rahat, B. (2020). Covid-19 and asset management in E.U.: A preliminary assessment of performance and investment styles. Journal of Asset Management, 21, 281-291.

Saiti, B., Bacha, O. I., & Masih, M. (2016). Testing the conventional and Islamic financial market contagion: evidence from wavelet analysis. Emerging Markets Finance and Trade, 52(8), 1832-1849.

Salisu, A. A., & Gupta, R. (2021). Oil shocks and stock market volatility of the BRICS: A GARCH-MIDAS approach. Global Finance Journal, 48, 100546.

Shaik, A. R., & Syed, A. M. (2019). Intraday return volatility in saudi stock market: An evidence from tadawul all share index. Management Science Letters, 9(7), 1131–1140. https://doi.org/10.5267/j.msl.2019.3.012

Tao, R., Su, C. W., Xiao, Y., Dai, K., & Khalid, F. (2021). Robo advisors, algorithmic trading and investment management: Wonders of fourth industrial revolution in financial markets. Technological Forecasting and Social Change, 163(October 2020), 120421. https://doi.org/10.1016/j.techfore.2020.120421

Teplova, T., & Tomtosov, A. (2021). Can high trading volume and volatility switch boost momentum to show greater inefficiency and avoid crashes in emerging markets? The economic relationship in factor investing in emerging markets. The Quarterly Review of Economics and Finance, 80, 210-223.

Tissaoui, K., Hkiri, B., Talbi, M., Alghassab, W., & Alfreahat, K. I. (2021). Market volatility and illiquidity during the COVID-19 outbreak: Evidence from the Saudi stock exchange through the wavelet coherence approaches. The North American Journal of Economics and Finance, 58, 101521.

Umar, M., Mirza, N., Rizvi, S. K. A., & Furqan, M. (2021). Asymmetric volatility structure of equity returns: Evidence from an emerging market. The Quarterly Review of Economics and Finance.

Wahyudi, I., & Sani, G. A. (2014). Interdependence between Islamic capital market and money market: Evidence from Indonesia. Borsa Istanbul Review, 14(1), 32-47.

Ni, Z., Wang, L., & Li, W. (2021). Do fund managers time implied tail risk? — Evidence from Chinese mutual funds. Pacific Basin Finance Journal, 68(99), 101590. https://doi.org/10.1016/j.pacfin.2021.101590