nep-sea New Economics Papers
on South East Asia
Issue of 2014‒07‒05
23 papers chosen by
Kavita Iyengar
Asian Development Bank

  1. Dynamics of Business Cycles in Vietnam: A comparison with Indonesia and Philippines By Le, Ha
  2. Contagion Effects of US Subprime Crisis on ASEAN-5 Stock Markets: Evidence from MGARCH-DCC Application By Chunxiu, Ma; Masih, Mansur
  3. Economic Growth and Poverty in Vietnam: Evidence from Elasticity Approach By Minh Son Le; Duc Tho Nguyen; Tarlok Singh
  4. Connecting South Asia to Southeast Asia : Cross-Border Infrastructure Investments By Jean-Francois Gautrin
  5. Sovereign bond yields in emerging Asia: New evidence By Thi-Hong-Hanh Pham
  6. Two views of international monetary policy coordination By Bullard, James B.
  7. The Co-movement of Selective Conventional and Islamic Stock Markets in East Asia: Is there any Impact on Shariah Compliant Equity Investment in China? By Saiti, Buerhan; Masih, Mansur
  8. The Dynamic Linkages between Islamic Index and the Major Stock Markets: New Evidence from Wavelet time-scale decomposition Analysis By Abu Bakar, Norhidayah; Masih, Abul Mansur M.
  9. Testing the Conventional and Islamic Financial Market Contagion: Evidence from Wavelet Analysis By Saiti, Buerhan; Bacha, Obiyathulla; Masih, Mansur
  10. Hierarchical Structure of the Foreign Trade: The Case of the United State By Ersin Kantar
  11. A Regional Analysis of Markets Uncertainty Spillovers By Kamel Malik Bensafta
  12. Is the global leadership of the US financial market over other financial markets shaken by 2007-2009 financial crisis? Evidence from Wavelet Analysis By Saiti, Buerhan; Bacha, Obiyathulla; Masih, Mansur
  13. The Effect of Green Taxation and Economic Growth on Environment Hazards: The Case of Malaysia By Nanthakumar, Loganathan; Shahbaz, Muhammad; Taha, Roshaiza
  14. Growth with equity in Singapore : challenges and prospects By Tat Hui, Weng; Toh, Ruby
  15. Are diversification benefits obtainable within the same asset class? New evidence from Malaysian Islamic REITS By Mokhtar, Maznita; Masih, Mansur
  16. The Impact of Crude Oil Price on Macroeconomic Variables: New Evidence from Malaysia By Abdullah, Ahmad Monir; Masih, Abul Mansur M.
  17. Dynamic Integration of Domestic Equity Price, Foreign Equity Price and Macroeconomic Indicators: Evidence from Malaysia By Kabir, Sarkar Humayun; Masih, Mansur
  18. Is There A Diversification “Cost” of Shari’ah Compliance? Empirical Evidence from Malaysian Equities By Kamil, Nazrol; Bacha, Obiyadulla; Masih, Mansur
  19. Multi-scale Lead-Lag Relationship between the Stock and Futures Markets: Malaysia as a Case Study By Jusoh, Hashim; Bacha, Obiyathulla; Masih, Abul Mansur M.
  20. Causality between Stock Market Index and Macroeconomic Variables: A Case Study for Malaysia By Abdullah, Ahmad Monir; Saiti, Buerhan; Masih, Abul Mansur M.
  21. The Role of Islamic Asset Classes in the Diversified Portfolios: Mean Variance Spanning Test By Dewandaru, Ginanjar; Masih, Rumi; Bacha, Obiyathulla I.; Masih, A. Mansur M.
  22. Does a held-to-maturity strategy impede effective portfolio diversification for Islamic bond (sukuk) portfolios? A multi-scale continuous wavelet correlation analysis By Najeeb, Syed Faiq; Bacha, Obiyathulla; Masih, Mansur
  23. Testing Sukuk And Conventional Bond Offers Based On Corporate Financing Theories Using Partial Adjustment Models: Evidence From Malaysian Listed Firms By Hanifa, Mohamed Hisham; Masih, Mansur; Bacha, Obiyathulla

  1. By: Le, Ha
    Abstract: Abstract: The objective of this paper is to analyze the dynamics of business cycle features and investigate the main source of macroeconomic fluctuations in Vietnam, and then make comparison to Indonesia and the Philippines. In the first task, the business cycle features are evaluated by properties of data, including volatility, persistence and co-movement after taking Hodrick-Prescott (HP) filter in 2 periods: before and after the global financial crisis in 2008. Results indicate that these properties mostly concentrate on second period (2008-2013) in Vietnam, whereas the Asian Financial Crisis leads to a high volatility and persistence in Philippines and Indonesia. In order to identify the sources of macroeconomic fluctuations, the study adopts the Structural Vector Autoregression (SVAR) with data covered from 1996 to 2013. The evidence for countries suggests that (i) the main source of output variance is domestic supply shocks but there is a significant decrease in long-run; (ii) The fluctuations of trade balance are mostly due to external shocks, especially term of trade shocks in Vietnam, as opposed to Philippines and Indonesia where IS shocks play an important role; (iii) The fluctuations of real exchange rate are mainly driven by the domestic shocks but internal causes of each country are different; (iv) the most two important sources of price’s movements are domestic shocks, especially IS and nominal shocks in Vietnam.
    Keywords: Structure Shocks, Business Cycles, SVAR
    JEL: E6 E61
    Date: 2014–06–18
  2. By: Chunxiu, Ma; Masih, Mansur
    Abstract: We attempted to investigate the contagion effects of the US subprime crisis on ASEAN-5 stock markets [including Malaysia (conventional and Islamic), Thailand, Singapore, Indonesia, Philippines] by applying MGARCH-DCC through the period of January 1, 2004 to July 5, 2012 on daily stock indices returns, and also Continuous Wavelet Transform coherence method through the period of January 1, 2006 to December 31, 20091 on daily stock indices returns. This is motivated by the fact that the 2007-2009 crises in the US mortgage market were transmitted to the rest of the world through cross-country banking linkages. This paper, to our best knowledge, is the first attempt to explore such issue for the ASEAN-5 markets (including Malaysia Islamic stock market) using the most recent econometric techniques. We found evidence that there were statistically significant contagion effects from the US sub-prime crisis to the ASEAN-5 countries and the contagion occurred probably around mid-2008. Our results tend to indicate consistent co-movement between most of the ASEAN-5 stock markets and the US stock market in the long run. We also uncovered evidence of a wide variation in co-movement across different timescales during the financial crisis. The Malaysia conventional stock market is found to be more contagious than its counterpart, the Malaysia Islamic stock market, and the latter is negatively correlated with the US stock market with a decreasing co-movement pattern even during the crisis period indicating policy implications for portfolio diversification.
    Keywords: contagion, ASEAN stock markets, MGARCH-DCC
    JEL: C22 G15
    Date: 2014–06–29
  3. By: Minh Son Le; Duc Tho Nguyen; Tarlok Singh
    Keywords: Growth elasticity of poverty, economic growth, pro-poor growth, poverty, province, Vietnam.
    JEL: O10 O40 I30
    Date: 2014–01
  4. By: Jean-Francois Gautrin (Asian Development Bank Institute (ADBI))
    Abstract: South Asia and Southeast Asia have been connected for many centuries, with the degree of connectivity varying over time. This paper explores strengthening connectivity between the two subregions by identifying the missing links in transport connectivity. The paper is specifically concerned with the role of cross-border transport infrastructure investments. To this end, the author reviews all possible road and rail land corridors that would help create seamless transport connectivity. Missing gaps and corresponding transport infrastructure projects are identified, and projects are screened and prioritized. For the selected critical projects, the study recommends phased investments.
    Keywords: South Asia, Southeast Asia, Cross-Border Infrastructure Investment, transport connectivity, transport infrastructure
    JEL: H41 H54 O22 F36
    Date: 2014–05
  5. By: Thi-Hong-Hanh Pham (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)
    Abstract: This paper studies the determinants of sovereign bond yields in nine emerging Asian countries over the period 1994-2012. In the long-run, we first reveal that sovereign bond yields weakly and negatively depends on the changes in public debt. This result is not consistent with the theoretical hypothesis that rising government debt may foster sovereign bond yields through the default risk. Second, we fail to find out a long-run relationship between potential economic growth and sovereign borrowing costs in emerging Asia. Lastly, this paper evidences the preliminary interventions of emerging Asian authorities in separating government debt management from monetary management.
    Keywords: Debt market; Sovereign bond yields; Emerging Asia; Panel analysis.
    Date: 2014–06–25
  6. By: Bullard, James B. (Federal Reserve Bank of St. Louis)
    Abstract: April 7, 2014. Presentation. "Two Views of International Monetary Policy Coordination." 27th Asia/Pacific Business Outlook Conference, USC Marshall School of Business–CIBER, Los Angeles, California.
    Date: 2014–04–07
  7. By: Saiti, Buerhan; Masih, Mansur
    Abstract: This paper investigates the dynamic causal linkages in the daily returns among seven major conventional and Islamic stock indices in East Asia through the application of the time series techniques. We analyse seven conventional and Shariah -compliant stock indices (such as, FTSE Shariah China Index, Asia Shariah index, Malaysia EMAS Shariah Index, China SSE Composite Index, Hang Seng Index, Nikkei 225 and KOSPI) covering the period from 26 October 2007 to 1 March 2011. Essentially, the purpose of this research is to identify the extent of influence of conventional and Islamic, regional and international equity markets on Shariah-compliant equity investment in China. Our study is focused on investigating the following empirical questions: (i) which indices do the Shariah China Index commove with? (ii) which indices is the Shariah China Index Granger-causally related with ? and (iii) which major stock market was driving the selective conventional and Islamic markets? Our findings tend to suggest: (i) the Sharia China Index appears to have a theoretical and long-run comovement with all the select conventional and Islamic markets (as evidenced in the Cointegration and LRSM tests) (ii) the Shariah China Index is Granger-caused by all the conventional and Islamic markets (as evidenced in the VECM tests) (iii) Finally, what stands out is the leadership of the China conventional SSE market followed by the Malaysia Shariah market in driving all indices including the Sharia China index (as evidenced in the VDCs tests).
    Keywords: Shariah-Compliant Stocks, Unit Root Test, Cointegration, LRSM, VECM, VDCs, IRFs, Persistent Profiles
    JEL: C58 G15
    Date: 2014–06–29
  8. By: Abu Bakar, Norhidayah; Masih, Abul Mansur M.
    Abstract: The increase of globalization and financial liberalization along with the recurrence of the financial crises have made the issue of global stock market integration crucial particularly from the view of portfolio diversification. Moreover, an empirical time-scale-varying analysis from the perspective of Islamic stock is still lacking. The Islamic stocks are expected to be theoretically different from the conventional stocks in view of the Shariah-compliant restrictions, smaller and less diversified market. Therefore, this paper makes the first attempt to test the time-scale analysis of the linkages between the international Islamic stock index and six major international stock markets such as, the United States, United Kingdom, Europe, Japan, China, and Malaysia. The paper analyzes the cross volatility, comovement, and estimates the Granger causality between the stock markets using the recently applied continuous wavelet transform and maximal overlap discrete wavelet transform. The findings tend to suggest strong linkage between Islamic index and the western markets as compared to the Asian markets. The volatility and comovements between stock indices are higher and unstable during the financial crises. Furthermore, the results indicate the existence of inefficient market, spillover effect of financial crisis, strong causality effects and bi-directional causality between Islamic index and other international indices. As for the policy implications, the international investors should include the Asian market in their investment portfolio, however, the instability and high comovement especially during the crises will limit the investors‟ ability to exploit international diversification. Additionally, the inefficient markets might suggest an arbitrage opportunity for the investors.
    Keywords: Islamic index, volatility, cross-volatility, comovement, and causality
    JEL: C22 G11 G15
    Date: 2014–06–29
  9. By: Saiti, Buerhan; Bacha, Obiyathulla; Masih, Mansur
    Abstract: A major issue facing the investors in the financial markets of the contemporary world is to identify whether the observed stock market fluctuations are due mainly to contagion or fundamentals. This is due to the fact that if the fluctuations are mainly due to a contagion, then it is something like a ‘virus’ which would disappear after a few days. In contrast, if the fluctuations are mainly due to fundamentals, then it is something like a ‘pneumonia’ which is likely to continue for a long time. This study is the first attempt at testing whether there has been any contagion among the Shari’ah-compliant stock indexes during the most recent international financial crisis: the US subprime crisis of 2007-2009 and the Lehman Brothers collapse in 2008, with the application of a time-frequency decomposition technique known as ‘wavelet approach’ both in discrete and continuous forms recently imported to finance from engineering sciences. We analyze the daily data covering the period from June 2005 to December 2011 for the 18 MSCI conventional and Islamic stock market indexes of the Islamic (Malaysia, Indonesia, Turkey, GCC ex-Saudi) and non-Islamic countries (Japan, China, Korea, Taiwan and Hong Kong). Our study is focused on investigating the following empirical question: are the co-movements of selective stock markets normal (interdependent) or excessive (contagious) during the first and the second wave of the financial crisis? Our findings based on the time-frequency decomposition of wavelet approach are as follows: i) The wavelet correlation analysis indicates that, there is no clear evidence of contagion at any time-scales during the subprime mortgage crisis in USA; ii) However, during the collapse of Lehman Brothers, in all conventional stock indexes of non-Islamic countries except Japan, the wavelet correlation coefficients changed significantly at the first time-scale implying that there was a clear evidence of contagion at the first time-scale iii) But the conventional stock indexes of Islamic countries did not suffer from contagion excepting Indonesian MSCI stock index due to overlapping of confidence intervals iv) In all Islamic stock indexes in both Islamic and non-Islamic countries excepting China and Hong Kong Islamic MSCI indexes, the wavelet correlation coefficients changed insignificantly at all scales. Therefore, we fail to reject the null hypothesis implying that there was no clear evidence of contagion at all time-scales excepting China and Hong Kong. Additionally, for robustness, we studied the dynamic correlations between two continuous wavelet transforms through wavelet coherency analysis. The findings whether the stock comovements triggered by the financial crises were showing interdependence or contagion are plausible and intuitive and have implications for both the conventional and Shari’ah-compliant stock markets in terms of asset allocation strategy of risk managers and for policymakers’ optimal policy response to crises.
    Keywords: Wavelet time-frequency decompositions, Contagion, Interdependence, Wavelet Correlation, Wavelet coherence, conventional and Shari’ah-Compliant Stock markets
    JEL: C58 P5
    Date: 2014–06–28
  10. By: Ersin Kantar
    Abstract: This study uses hierarchical structure methods (minimal spanning tree, (MST) and hierarchical tree, (HT)) to examine the hierarchical structures of the United State (US) foreign trade by using the real prices of their commodity export and import move together over time. We obtain the topological properties among the countries based on US foreign trade over the periods of 1985-2011. We also perform the bootstrap techniques to investigate a value of the statistical reliability to the links of the MSTs. Finally, we use a clustering linkage procedure in order to observe the cluster structure much better. The results of the topologies structural of these trees are as follows: i) We identified different clusters of countries according to their geographical location and economic growth. ii) Our results show that the European Union and Asian countries are more important within the network, due to a tighter connection with other countries. The country's most important trading partners are the Canada, China, Mexico, Japan, Germany, United Kingdom, South Korea, France, Taiwan, India, Singapore and Netherlands iii) We have also found that these countries play a significance role for US foreign trade and have important implications for the design of portfolio and investment strategies.
    Date: 2014–06
  11. By: Kamel Malik Bensafta (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans)
    Abstract: This study aims to describe the transmission of uncertainty between the stock markets of four aggregate regions: North America, Europe non Euro-zone, Asia and the euro area. We use a non-linear VAR model with innovations following a Multivariate GARCH with variance regime change. The interest of the model with regime change is to correct the estimation bias caused by the overestimation of the shocks persistence. We apply the non-linear VAR model with regime change in daily MSCI data aggregated from four regions over the period from June 2005 to October 2013. This period included the crisis episodes in 2007 and 2011. Our results indicate the importance of taking into account changes in variance in measuring the persistence of volatility shocks. They also show the high exposure of European and Asian markets to the uncertainties of North American markets. The transmission in time of crisis is higher compared to the quiet period. This result confirms the contagious nature of the crises of 2007 and 2011 and supports the thesis of the contingency theory to crisis.
    Keywords: MGARCH ; Structural breaks ; subprime crisis ; volatility transmission
    Date: 2014–06–26
  12. By: Saiti, Buerhan; Bacha, Obiyathulla; Masih, Mansur
    Abstract: The issue of market linkages (and price discovery) between stock indices and the lead-lag relationship are topics of interest to financial economists, financial managers and analysts. The lead-lag relationship analysis should take into account both the short and long-run investor. From a portfolio diversification perspective, the first type of investor is generally more interested in knowing the comovement of stock returns at higher frequencies, that is, short-run fluctuations, while the latter concentrates on the relationship at lower frequencies, that is, long-run fluctuations. The study uses a technique known as the ‘wavelet approach’ which has been very recently imported to finance from engineering sciences. Daily return data covering the period from June 2005 to December 2011 for MSCI stock indices of East Asian countries (Japan, China, Korea, Taiwan and Hong Kong) are analyzed. We examine the following empirical question: Is the global leadership of the US financial market shaken by the 2007-2009 financial crisis in the short- and long run? Our findings tend to, more or less, broadly suggest that regardless of the period considered, the US market is still the global leader in the exact time intervals. This is evidenced in the asymmetry of cross-correlation function of MSCI stock indices with the MSCI index of the US becoming more pronounced as the timescale increases. The evidence hitherto unexplored produced by the application of wavelet cross-correlation amongst the selected stock indices provides robust and very useful information to international financial analysts and short-term investors.
    Keywords: Lead-lag, Causality, Wavelet, Stock index, Financial crisis
    JEL: C22 G15
    Date: 2014–06–16
  13. By: Nanthakumar, Loganathan; Shahbaz, Muhammad; Taha, Roshaiza
    Abstract: This paper explores how carbon taxation and economic growth affect environment hazards in Malaysia using time series data over the period of 1974-2010. We applied cointegration and causality approaches to determine long term and the direction of causal relationship between these variables. Based on the results, we found the cointegration relationship between the variables. Furthermore, we noted that Kuznets’ theory i.e. inverted-U shaped curve between economic growth and CO2 emissions is valid for Malaysia but the carbon taxation policy is ineffective to control CO2 emissions. The causality analysis revealed that there is bidirectional relationship is found between carbon tax and CO2 emissions. Economic growth Granger causes CO2 emissions and carbon tax is Granger cause of economic growth. To enhance the awareness on pollution issues governments should rely on alternative instruments, which may give benefit not only to taxpayers but also to reduce pollution, which is the pivotal issue to be tackle globally.
    Keywords: economic growth, environment hazards
    JEL: C1
    Date: 2014–06–16
  14. By: Tat Hui, Weng; Toh, Ruby
    Abstract: This paper highlights the current state of income inequality in Singapore and the labour market challenges pertaining to retirement adequacy and other social security issues. The potential implications on productivity and the labour market of recent demographic and inclusive growth policies will also be discussed.
    Keywords: labour market, employment, employment policy, labour policy, Singapore, marché du travail, emploi, politique de l'emploi, politique du travail, Singapour, mercado de trabajo, empleo, política de empleo, política laboral, Singapur
    Date: 2014
  15. By: Mokhtar, Maznita; Masih, Mansur
    Abstract: Although real estate is believed to be the steady element of a portfolio, volatilities during the global financial crisis has thrown off its “defensive stock” status in terms of optimizing portfolio benefit. Evidence from past research have revealed the same for the Real Estate Investment Trust (REIT) in Malaysia. This paper examines the volatility and stability of the REITs in Malaysia (MREITs), particularly analyzing the correlations between the islamic REITs and their conventional counterparts. We further observe the existence of contagion effects between these assets to ascertain whether the islamic REITs are led by the more established conventional REITs. The DCC-MGARCH model is applied to study the volatilities and correlations within this asset class. We also use the wavelet coherence methodology to see the contagion effects between the REITs, within a time frequency domain. Our contribution to the scarce literature on Islamic REITs is the analysis of time varying correlations from a sector-related perspective, and explaining interdependencies in the time domain as well as the frequency domain. Our findings show that the Malaysian REITs have a long run fundamental relationship with each other, but are independently moving within their respective sectors in the shorter term. The results imply that diversification benefits are not hindered as long as the MREITs held in the portfolio belong to different sectors. Most importantly, although the Shariah (Islamic law) investor may be limited in the selection of investment assets, investing in all three islamic MREITs concurrently will not increase the riskiness of the portfolio.
    Keywords: REITs, MGARCH, Dynamic Correlation Coefficient (DCC), wavelet coherency, frequency domain
    JEL: C22 G11
    Date: 2014–06–29
  16. By: Abdullah, Ahmad Monir; Masih, Abul Mansur M.
    Abstract: 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.
    Keywords: Commodity, Malaysian Macro Variables, Continuous Wavelet Transformation, Diversification, Causality
    JEL: C58 Q4
    Date: 2014–06–29
  17. By: Kabir, Sarkar Humayun; Masih, Mansur
    Abstract: How does the extent of integration of the Malaysian equity market with the equity markets of Japan and USA vary at different time scales? How dynamic is the extent of co-movement of equity price with the major macroeconomic indicators of Malaysia? In order to answer these two major issues, this study attempts to investigate the dynamic integration of the Malaysian equity market with the equity markets of Japan and USA, along with the three major macroeconomic control variables: exchange rate, consumer’s price index (CPI) and industrial production (IP) of Malaysia. The methodology applied initially used the standard time series techniques such as, Johansen cointegration technique, vector error correction model (VECM), variance decompositions (VDCs), followed by the application of the recent dynamic rolling cointegration, Beveridge-Nelson (BN) time series decompositions and finally, wavelet coherence of time-scale decompositions on monthly data starting from February,1990. The study finds one significant cointegrating relationship, which could be an indication of incomplete integration process as evidenced in the dynamic rolling cointegration approach. VECM and VDC indicate that the Malaysian equity market appears to be more influenced by the Japanese equity market and CPI of Malaysia. BN decompositions evidence almost simultaneous co-movement of permanent and transitory components of all variables and the co-movement appears to be closer during the financial crises. Finally, the wavelet coherence suggests closer co-movement of the Malaysian equity market with the Japanese equity market, which tends to vary according to different time scales. The findings of wavelet coherence on co-movement of the equity prices at different time scales tend to be different from those of the standard time series techniques such as, VECM and VDCs. The results of the study have strong policy implications.
    Keywords: Domestic stock price, foreign stock price, exchange rate, consumer’s price index, industrial production, dynamic cointegration, Beveridge-Nelson time series decompositions, wavelet coherence
    JEL: C22 C58 E44 F36 G15
    Date: 2014–06–29
  18. By: Kamil, Nazrol; Bacha, Obiyadulla; Masih, Mansur
    Abstract: Islamic equity portfolios work with a smaller investment universe given the filtering of non-Shari’ah compliant stocks. It has been theoretically argued that this culminates in suboptimal portfolio diversification which in turn adversely affects risk-adjusted returns. We employ a number of methods, namely construction of efficient frontiers, time-varying maximum Sharpe ratios, MGARCH-DCC and analysis of covariance (ANCOVA), to offer empirical evidence that such a conceived portfolio diversification “penalty” is far from a foregone conclusion, at least empirically. Our results show that Islamic portfolios are not invariably handicapped in terms of portfolio diversification. We also explored dimensions which may account for differences in relative investment performance between Islamic and conventional portfolios such as portfolio constraints, length of investment horizon and market conditions. We believe this paper is among the first to apply substantial empirical analysis of the portfolio diversification perspective on Islamic equity investments.
    Keywords: Islamic equity portfolio, portfolio diversification, efficient frontier, maximum Sharpe ratio, MGARCH-DCC, analysis of covariance (ANCOVA)
    JEL: C20 C61 G11
    Date: 2014–06–28
  19. By: Jusoh, Hashim; Bacha, Obiyathulla; Masih, Abul Mansur M.
    Abstract: There is a considerable literature relating to a lead-lag relationship between the stock index (spot) and stock index futures markets in developed countries compared to emerging countries. The analysis of this relationship in an emerging market based on a different investment horizon is significant for both academic and trading purposes. In this study, we analyze the lead-lag relationship between stock index and stock index futures in Malaysia. We use a new approach based on the Continuous Wavelet Transform (CWT) and the Discrete Wavelet Transform (DWT). The results show variability of the lead-lag relationship across frequency ranges and time scales, and also occasional in-phase behaviour between both markets. The relationships between stock index and stock index futures are shown to evolve over time with non-homogeneous trends across different time scales. Some strong correlations have been found in lead-lag interactions between the markets. The result from this study would provide a better picture of a current derivatives market in emerging countries, specifically in Malaysia. Hopefully it will shed some light in furthering the development of Islamic equity futures within the Islamic capital market, therefore will encourage Islamic asset managers to use derivatives as a hedging tool to protect their funds’ value.
    Keywords: Stock Index, Stock Index Futures, Lead-Lag Relationship, Continuous Wavelet Transform, Discrete Wavelet Transform
    JEL: C5 G3
    Date: 2014–06–28
  20. By: Abdullah, Ahmad Monir; Saiti, Buerhan; Masih, Abul Mansur M.
    Abstract: The causal relations and dynamic interactions among macroeconomic variables and stock market index are important in the formulation of a country’s macroeconomic policy. In this study, to investigate the lead-lag relationship between stock market index and macroeconomic variables, we employ several conventional time-series techniques and a recently introduced method – wavelet analysis - to economics and finance. The data used in this paper is the monthly data of the selected macroeconomic variables such as (1) Kuala Lumpur Composite Index, (2) exchange rate, (3) inflation, (4) government bond yield, (5) short-term interest rate and (6) export over the period of January 1996 to September 2013. Our findings tend to suggest that a cointegrating relationship does exist between KLCI and selected macroeconomic variables. The results of the error correction model, the generalized variance decompositions as well as the wavelet cross-correlation analysis suggest that the short-term interest rate, KLCI and government bond yields are exogenous variables; especially, the short-term interest rate is the most leading variable. Policy makers may concentrate on the adjustment and control of the short-term interest rate in order to achieve the desired results for the target economic variables.
    Keywords: Stock Market, Causality, Macroeconomic variables, Time-series techniques, Wavelet Analysis
    JEL: C22 C58 E44
    Date: 2014–06–29
  21. By: Dewandaru, Ginanjar; Masih, Rumi; Bacha, Obiyathulla I.; Masih, A. Mansur M.
    Abstract: 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.
    Keywords: Islamic finance, Asset classes, Mean variance spanning test, Fat tails, Asset allocation
    JEL: G3
    Date: 2014–06–23
  22. By: Najeeb, Syed Faiq; Bacha, Obiyathulla; Masih, Mansur
    Abstract: The Islamic bonds or sukuk market is one of the fastest growing segments of the nearly US$2trillion global Islamic finance industry. However, lack of trading in secondary sukuk markets is a peculiar feature in this sector and both institutional and retail sukuk investors are known to adopt a held-to-maturity investment strategy. Consequently, there is a critical gap in literature in studying the portfolio diversification opportunities available to sukuk investors and evaluating these in the light of held-to-maturity strategies. This paper (using recently available data and continuous wavelet transform methodologies) has made an initial attempt to study the portfolio diversification strategies for Islamic bond (sukuk) portfolios across heterogeneous investment horizons using the Malaysian and the Gulf Cooperation Council (GCC) sukuk markets as a case study. Our findings critically indicate that returns between local currency sukuk in different markets have low levels of long-term correlations, thus enabling portfolio diversification benefits. However, international currency sukuk issued in different markets exhibit high levels of long-term correlations which impede portfolio diversification benefits for held-to-maturity investments. A similar impediment is also witnessed in the domestic market context where diversification is intended by investing in different types of domestic sukuk. Overall, our findings critically highlight the feasibility of held-to-maturity sukuk investment strategies from a portfolio diversification perspective.
    Keywords: Portfolio Diversification, Sukuk, Islamic Bonds, Continuous wavelet analysis
    JEL: C63 G11 G12 G24 Z12
    Date: 2014–06–28
  23. By: Hanifa, Mohamed Hisham; Masih, Mansur; Bacha, Obiyathulla
    Abstract: Sukuk (Islamic debt securities) are dominating the Malaysian capital market with strong support from the government, mega-conglomerates and firms. Sukuk, as an important source of firms’ financing, is increasingly catching up with conventional bonds in terms of volume of transactions and number of sukuk issuances. However, from theoretical perspectives, it is still largely unknown why some firms may consider sukuk issuance while others consistently rely on conventional bond offers. In examining this corporate financing behavior, most studies employed a partial adjustment model to predict whether firm have an optimal debt ratio, in which they partially adjust towards it when they deviate from it, consistent with trade-off prediction. Thus, the objective of this paper is twofold: firstly, to test firm target debt optimizing behavior and secondly, to find firm specific determinants of target debt ratio using a sukuk or conventional bonds issuance4 dataset. Our sample consists of 120 conventional bonds and 80 sukuk issuers from the year 2000 until 2011. We employ two advanced dynamic panel data estimators5, which have resulted in three major findings. Firstly, our results provide stronger support for trade-off view based on firm optimizing behavior among sukuk and conventional bond issuers, however with different issuance motives. Secondly, issuers of partnership-based sukuk and convertible bonds follow closely pecking order view, in which, the former is chosen if firms face a higher information asymmetry cost. Finally, while both exchange-based sukuk and straight bond issuers aligning towards a particular target, only firm with higher sales growth prefer the former. As such, together with industry insights, we attribute our findings that sukuk offers bring unique “benefits” to the issuers that may not be available if conventional bonds are issued instead, although it is against traditional theoretical interpretation.
    Keywords: sukuk, conventional bonds, trade-off theory, pecking order theory
    JEL: C5 G3
    Date: 2014–06–28

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