Journal of Risk

Advanced risk profile analysis of Islamic equity investment: evidence from the American, Asian and European markets

Mondher Bellalah and Zeineb Chayeh


As far as asset and liability management is concerned, the advanced analysis of the risk and return profile of Islamic financing and investment products today constitutes one of the greatest challenges for Islamic financial institutions. Given the fact that, by design, Islamic financial institutions should be keeping a handsome portion of their assets in equity investments, this paper brings out the dynamics of a specific risk profile inherent in Islamic equity investment based on investing in the sharia-compliant stock market. Therefore, we investigate three Islamic equity indexes, classified by economic hubs (Dow Jones Europe, Asia/Pacific and United States), against their conventional peers from 2003 to 2009. Our risk profile analysis is based on the estimation of two well-known advanced risk measures, namely value-at-risk (VaR) and expected shortfall (ES). FourVaR methodologies are used: historicalVaR, RiskMetrics, generalized autoregressive conditional heteroscedasticity conditional VaR models and the Cornish-Fisher VaR model. The models' assessments, based on the Kupiec (1995) test, allow us to better investigate the equity indexes' daily returns tails through the estimation of the generalized Pareto distributionVaR and ES measures. The end result of our advanced risk profile analysis is that Islamic equity indexes seem to depict a regional, as well as a periodic, character risk profile. Drawing from the specific features of the Dow Jones Islamic indexes and their compounds' inherent features, this paper argues that sharia screening, which alters the composition of Islamic indexes, contributes to the shaping of a distinguished risk profile.

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