effectual interrelationship among the islamic stock market of india with other emerging stock market

EFFECTUAL INTERRELATIONSHIP EFFECTUAL INTERRELATIONSHIP AMONG THE ISLAMIC STOCK AMONG THE ISLAMIC STOCK MARKET OF INDIA WITH OTHER MARKET OF INDIA WITH OTHER EMERGING STOCK MARKETEMERGING STOCK MARKET

MOHAMMAD IRFANMOHAMMAD IRFANRESEARCH SCHOLARRESEARCH SCHOLAR

DEPARTMENT OF MANAGEMENT DEPARTMENT OF MANAGEMENT CENTRAL UNIVERSITY OF HARYANA, MAHENDERGARH, CENTRAL UNIVERSITY OF HARYANA, MAHENDERGARH,

HARYANAHARYANA

OBJECTIVESOBJECTIVESThe present paper is focused on examining the risk and return behaviour of the selected Islamic benchmark indices (S&P BSE Shariah, S&P Europe 350 Shariah, S&P Japan 500, S&P GCC Shariah, DJIM ) during the period from the date of launch of Nifty Shariah index in Indian Capital Market i.e. from 1st Jan 2010 to 31st Oct 2013

OBJECTIVESOBJECTIVESTo analysis the performance of S&P BSE Shariah Index, S&P Europe Shariah, S&P GCC Composite Shariah, S&P Japa 500, Dow Jones Islamic Market(DJIM).

To analysis the co-integration of S&P BSE Shariah Index, with other selected indices and vice versa.

To find out the integration of S&P BSE Shariah Index by volatility of selected indices and vice versa.

To do comparative analysis between S&P BSE Shariah Index, S&P Europe Shariah, S&P GCC Composite Shariah, S&P Japan 500, Dow Jones Islamic Market(DJIM).

INTRODUCTIONINTRODUCTION

ISLAMIC CANONICAL LAWISLAMIC CANONICAL LAW

Shariah is Islamic canonical law, which observant Muslims Shariah is Islamic canonical law, which observant Muslims adhere to in their daily lives. Shariah has certain strictures adhere to in their daily lives. Shariah has certain strictures regarding finance and commercial activities permitted for regarding finance and commercial activities permitted for Muslims. It prescribes a set of criteria which needs to be Muslims. It prescribes a set of criteria which needs to be satisfied before a Muslim investor or institution can invest in satisfied before a Muslim investor or institution can invest in the equity of a given company. From the view point of the equity of a given company. From the view point of Shariah law, businesses such as those dealing in pork, Shariah law, businesses such as those dealing in pork, alcohol, gambling, conventional financial services, media or alcohol, gambling, conventional financial services, media or advertising, tobacco, pornography, music etc are non-advertising, tobacco, pornography, music etc are non-permissible for investment. Furthermore, companies have to permissible for investment. Furthermore, companies have to be screened so that they satisfy certain accounting ratio be screened so that they satisfy certain accounting ratio restrictions.restrictions.

INTRODUCTIONINTRODUCTIONQURAAN STATES THE BUSINESS The Islamic economy is built upon the real economy this is where the process of production of tangible goods and services, Islam has designated a role for finance in the economy - due to Islam's focus on the real economy which is the wealth creating aspect of any economy finance in Islam is not an end in itself as there is no interest (Riba). Wealth in Islam is created through each stage of industry i.e. mining, refining, manufacturing and sales' All of this adds value at each stage and creates wealth for the economy.

ال�ب�ي� لله� ال� ح�أ� ب�او� لر� ث�ال� اال�ب�ي�ع�م� �ن�م� �إ ال�وا ق� م� ن�ه�

ذ�ل�ك�ب�أ�ب�ا الر� م� ر� ع�و�ح�

"That is because they say: ‘Trading is only like Riba,' whereas Allah has permitted trading and forbidden Riba." [al-Baqarah, 2:275]


• SHARIAH SCREENINGSHARIAH SCREENING

• Standard & Poor’s has contracted with Ratings Intelligence Standard & Poor’s has contracted with Ratings Intelligence Partners (RI) to provide the Shariah screens and filter the stocks Partners (RI) to provide the Shariah screens and filter the stocks based on these screens. Ratings Intelligence Partners is a based on these screens. Ratings Intelligence Partners is a London/Kuwait-based consulting company specializing in London/Kuwait-based consulting company specializing in solutions for the global Islamic investment market. Its team solutions for the global Islamic investment market. Its team consists of qualified Islamic researchers who work directly with a consists of qualified Islamic researchers who work directly with a Shariah Supervisory Board. It is continually working with Shariah Supervisory Board. It is continually working with regional banks to create Shariah-compliant equity products and regional banks to create Shariah-compliant equity products and expand investment offerings. Shaiarh Screening based on:expand investment offerings. Shaiarh Screening based on:

• Sectoral Based Screening: Sectoral Based Screening: BSE TASIS Shariah50 includes BSE TASIS Shariah50 includes sector like Oil & Gas, FMCG, IT, Health Care, Transport sector like Oil & Gas, FMCG, IT, Health Care, Transport Equipment, Housing Related, Telecom, Metal Mining, capital Equipment, Housing Related, Telecom, Metal Mining, capital Goods, Chemical & Petrol, Consumer Durable, Diversified. All Goods, Chemical & Petrol, Consumer Durable, Diversified. All these sectors are Permissible in Shariah Law.these sectors are Permissible in Shariah Law.


• Financial Based Screening: Financial Based Screening: Since interest-based transactions are Since interest-based transactions are prohibited by Shariah, companies passing the business screening prohibited by Shariah, companies passing the business screening stage are further screened to ensure that their dealings involving stage are further screened to ensure that their dealings involving interest-based debt or earnings out of deployment of funds on interest-based debt or earnings out of deployment of funds on interest are within the maximum tolerance limits set by Shariah interest are within the maximum tolerance limits set by Shariah scholars.scholars.

• Interest based-debt should be less than or equal to 25% of Total Interest based-debt should be less than or equal to 25% of Total Assets. Assets.

• Interest income plus returns (currently considered @8%) from Interest income plus returns (currently considered @8%) from interest-based investments should be less than or equal to 3% of interest-based investments should be less than or equal to 3% of the total income. the total income.

• Receivables plus cash and bank balances should be less than or Receivables plus cash and bank balances should be less than or equal to 90% of Total Assets’equal to 90% of Total Assets’

HYPOTHESISHYPOTHESIS

• Null HypothesisNull Hypothesis

• HH0 0 = There is no significant relationship between = There is no significant relationship between S&P BSE Shariah and other select indices.S&P BSE Shariah and other select indices.

• HH0 0 = There is no significant relationship between = There is no significant relationship between S&P Europe 350 Shariah and other select indices.S&P Europe 350 Shariah and other select indices.

• HH0 0 = There is no significant relationship between = There is no significant relationship between S&P GCC Investable Shariah and other select S&P GCC Investable Shariah and other select indices.indices.

• HH0 0 = There is no significant relationship between = There is no significant relationship between S&P Japan 500/ TOPIX 150 Shariah and other select S&P Japan 500/ TOPIX 150 Shariah and other select indices.indices.

• HH0 0 = There is no significant relationship between = There is no significant relationship between DJIM and other select indices.DJIM and other select indices.

HYPOTHESISHYPOTHESIS• H1-H1-CSR and FP (Financial Performance) is an CSR and FP (Financial Performance) is an

independent from each other and CSR does not independent from each other and CSR does not depend upon FP as dividend of company.depend upon FP as dividend of company.

DATA ANALYSIS & INTERPRETATIONDATA ANALYSIS & INTERPRETATION

MethodologyStudy the Performance of Risk and Return behavior of indices .Beta (CAPM) Capital Assets Price Model . CAGR (Compound Annual Growth Rate). Correlation. T-test, etc.

EMPIRICAL EMPIRICAL RESULTSRESULTS

• Risk and Return behaviour of Risk and Return behaviour of S&P BSE S&P BSE Shariah, S&P Europe 350, Shariah, S&P Europe 350, S&P GCC S&P GCC Investable Shariah, Investable Shariah, The S&P/TOPIX 150 The S&P/TOPIX 150 and the Dow Jones Islamic Market Index and the Dow Jones Islamic Market Index from 1from 1stst Jan. 2010 to 30 Jan. 2010 to 30thth Sept. 2013 Sept. 2013..

• This part of study narrated the risk and return This part of study narrated the risk and return behavior of Shariah Index. The daily returns of behavior of Shariah Index. The daily returns of all selected Indices were calculated as natural all selected Indices were calculated as natural logarithm of today price divide by tomorrow logarithm of today price divide by tomorrow price.price.


Table 1: Performance of All Selected Islamic Indices from 1st Jan. 2010 to 31st Oct. 2013

The table 1 explain the respectively of GCC Shariah is lower as compare to the volatility of other Islamic indices, However, CAGR of DJIM Shariah is greater then the CAGR other Islamic indices. Hence, GCC Shariah is less risky than other Islamic indices. But growth of DJIM Shariah is increase because of oldest Islamic indices in the world.

Indices Returns Volatility CAGRBSE Shariah 0.018 27.73 -2.00Europe Shariah 0.034 30.04 -2.00GCC Shariah 0.013 21.06 -2.00Japan Shariah 0.007 38.91 -2.00DJIM Shariah 0.029 30.83 0.06


Table 2: Performance of Beta between S&P BSE Shariah and Other Selected Islamic Indices from 1st Jan. 2010 to 31st Oct. 2013

The table 2, described the results of the beta with respective to BSE Shariah. The beta value of BSE Shariah Indices over the Other Selected Islamic Indices are S&P Europe, S&P Japan, DJIM Islamic are negative market movements and rest of S&P GCC Shariah positive impact of market movement.

Indices Beta

S&P BSE Shariah & S&P Europe -0.798

S&P BSE Shariah & S&P GCC Shariah 0.782

S&P BSE Shariah & S&P Japan -0.103

S&P BSE Shariah & DJIM -0.174


Table 3: Performance of Beta between S&P Europe Shariah and Other Selected Islamic Indices from 1st Jan. 2010 to 31st Oct. 2013

The table 3, described the results of the beta with respective to S&P Europe Shariah. The beta value of S&P Europe Shariah Indices over the Other Selected Islamic Indices are S&P BSE Shariah, S&P GCC Shariah, Islamic indices are negative market movements and rest of S&P Japan Shariah, DJIM positive impact of market movement.

Indices Beta

S&P Europe & S&P BSE Shariah -0.937

S&P Europe & S&P GCC Shariah -0.307

S&P Europe & S&P Japan 0.363

S&P Europe & DJIM 0.668


Table 4: Performance of Beta between S&P GCC Shariah and Other Selected Islamic Indices from 1st Jan. 2010 to 31st Oct. 2013

The table 4, described the results of the beta with respective to S&P GCC Shariah. The beta value of S&P GCC Shariah Indices over the Other Selected Islamic Indices are S&P Europe Shariah, DJIM, Islamic indices are negative market movements and rest of S&P Japan Shariah, S&P BSE Shariah positive impact of market movement.

Indices Beta

S&P GCC Shariah & S&P BSE Shariah 0.4509

S&P GCC Shariah & S&P Europe -0.1509

S&P GCC Shariah & S&P Japan 0.1263

S&P GCC Shariah & DJIM -0.1937


Table 5: Performance of Beta between S&P Japan and Other Selected Islamic Indices from 1st Jan. 2010 to 31st Oct. 2013

The table 5, described the results of the beta with respective to S&P Japan Shariah. The beta values of S&P Japan Shariah Indices over the Other Selected Islamic Indices are S&P BSE Shariah, Islamic indices is negative market movements and rest of S&P Europe Shariah, S&P GCC Shariah, DJIM are positive impact of market movement..

Indices Beta

S&P Japan & S&P BSE Shariah -0.204

S&P Japan & S&P Europe 0.609

S&P Japan & S&P GCC Shariah 0.431

S&P Japan & DJIM 0.267


Table 6: Performance of Beta between DJIM and Other Selected Islamic Indices from 1st Jan. 2010 to 31st Oct. 2013

The table 6, described the results of the beta with respective to DJIM. The beta values of DJIM Indices over the Other Selected Islamic Indices are S&P BSE Shariah, S&P GCC Shariah Islamic indices are negative market movements and rest of S&P Europe Shariah, S&P Japan are positive impact of market movement.

Indices Beta

DJIM & S&P BSE Shariah -0.215

DJIM & S&P Europe 0.704

DJIM & S&P GCC Shariah -0.042

DJIM & S&P Japan 0.167


Table 7: Correlation between S&P BSE Shariah and Other Selected Islamic Indices from 1st Jan. 2010 t o 31st Oct. 2013

The table 7, described The study of relationship between BSE Shariah and other selected Islamic indices indicates that, null hypothesis is rejected and alternate hypothesis is accepted in all the cases. Hence, there is a significant relationship between BSE Shariah and other world major Islamic indices. In all the cases, correlation is significant at 1% level of significance, indicating weak integration of BSE Shariah with DJIM, S&P Japan and S&P Europe. Though, the correlation of BSE Shariah is Moderate with S&P GCC Shariah.

IndicesCorrelati

on

Level of Correlati

on

T-test result

t-value p' value

Hypothesis Accepted

S&P BSE Shariah & S&P Europe -0.86 Weak

-0.37

5 0.708 H1: AcceptedS&P BSE Shariah & S&P GCC Shariah 0.59

Moderate

0.150 0.881 H1: Accepted

S&P BSE Shariah & S&P Japan -0.15 Weak0.21

7 0.828 H1: Accepted

S&P BSE Shariah & DJIM -0.19 Weak

-0.25



Table 8: Correlation between S&P Europe Shariah and Other Selected Islamic Indices from 1st Jan. 2010 t o 31st Oct. 2013

The table 8, described The study of relationship between S&P Europe Shariah and other selected Islamic indices indicates that, null hypothesis is rejected and alternate hypothesis is accepted in all the cases. Hence, there is a significant relationship between S&P Europe Shariah and other world major Islamic indices. In all the cases, correlation is significant at 1% level of significance, indicating weak integration of S&P Europe Shariah with S&P GCC Shariah, BSE Shariah. Though, the correlation of S&P Europe Shariah is Moderate with S&P Japan and High with DJIM.

IndicesCorrelati

on

Level of Correlati

on

T-test result

t-value p' value

Hypothesis Accepted

S&P Europe & S&P BSE Shariah -0.86 Weak0.37


S&P Europe & S&P GCC Shariah -0.22 Weak0.56


S&P Europe & S&P Japan 0.05Moderat

e0.52


S&P Europe & DJIM 0.69 High0.11



Table 9: Correlation between S&P GCC Shariah and Other Selected Islamic Indices from 1st Jan. 2010 t o 31st Sept. 2013

The table 9, described The study of relationship between S&P GCC Shariah and other selected Islamic indices indicates that, null hypothesis is rejected and alternate hypothesis is accepted in all the cases. Hence, there is a significant relationship between S&P GCC Shariah and other world major Islamic indices. In all the cases, correlation is significant at 1% level of significance, indicating weak integration of S&P GCC Shariah with S&P Europe Shariah, S&P Japan Shariah and DJIM. Though, the correlation of S&P GCC Shariah is Moderate with S&P BSEShariah.

IndicesCorrelati

on

Level of Correlati

on

T-test result

t-value p' value

Hypothesis Accepted

S&P GCC Shariah & S&P BSE Shariah 0.59

Moderate

-0.15


S&P GCC Shariah & S&P Europe -0.22 Weak

-0.56


S&P GCC Shariah & S&P Japan 0.23 Weak0.11


S&P GCC Shariah & DJIM -0.03 Weak

-0.42



Table 10: Correlation between S&P Japan Shariah and Other Selected Islamic Indices from 1st Jan. 2010 t o 31st Oct. 2013

The table 10, described The study of relationship between S&P Japan Shariah and other selected Islamic indices indicates that, null hypothesis is rejected and alternate hypothesis is accepted in all the cases. Hence, there is a significant relationship between S&P Japan Shariah and other world major Islamic indices. In all the cases, correlation is significant at 1% level of significance, indicating weak integration of S&P Japan Shariah with S&P GCC Shariah, S&P BSE Shariah and DJIM. Though, the correlation of S&P Japan Shariah is Moderate with S&P Europe Shariah.

IndicesCorrelati

on

Level of Correlati

on

T-test result

t-value p' value

Hypothesis Accepted

S&P Japan & S&P BSE Shariah -0.15 Weak

-0.21


S&P Japan & S&P Europe 0.47Moderat

e

-0.52


S&P Japan & S&P GCC Shariah 0.23 Weak

-0.11


S&P Japan & DJIM 0.21 Weak

-0.42



Table 11: Correlation between DJIM and Other Selected Islamic Indices from 1st Jan. 2010 t o 31st Oct. 2013

The table 11, described The study of relationship between DJIM and other selected Islamic indices indicates that, null hypothesis is rejected and alternate hypothesis is accepted in all the cases. Hence, there is a significant relationship between DJIM and other world major Islamic indices. In all the cases, correlation is significant at 1% level of significance, indicating weak integration of DJIM with S&P GCC Shariah, S&P BSE Shariah and S&P Japan. Though, the correlation of DJIM is high with S&P Europe Shariah.

IndicesCorrelat

ion

Level of Correlat

ion

T-test resultt-

value p' value

Hypothesis Accepted

DJIM & S&P BSE Shariah -0.19 Weak0.25


DJIM & S&P Europe 0.69 High

-0.11


DJIM & S&P GCC Shariah -0.03 Weak0.42


DJIM & S&P Japan 0.02 Weak0.42



Table 12: Correlation Matrix of All Selected Islamic Indices from 1st Jan. 2010 to 31st Oct. 2013

The tables 12, In comparing the returns of the All Selected Islamic indices that mean the relationship between of all Islamic indices show the level of relationship like strong, moderate, weak. This relationship is very similar to the result of Ahama and Ibrahim (2002) in Malaysia and P. Natarajan and M. Dharani (2011).

INDICESBSE

ShariahEurope Shariah

GCC Shariah

Japan Shariah

DJIM Shariah

S&P BSE Shariah 1 S&P Europe Shariah -0.009 1.000 S&P GCC Shariah 0.059 -0.022 1.000 S&P Japan Shariah -0.015 0.005 0.023 1.000 DJIM Shariah -0.019 0.069 -0.003 0.021 1


Table 13: Descriptive Statistics for All Selected Islamic Indices from 1st Jan. 2010 to 31st Oct. 2013

The table 13, S&P Japan Shariah has witnessed greater fluctuations which have been indicated by very high variation followed by DJIM, S&P Europe Shariah, S&P BSE Shariah. In the case S&P GCC Shariah has shown very low fluctuations. Skewness of the distribution of all the indices prices is negative.

INDICESBSE Shariah

Europe Shariah

GCC Shariah

Japan Shariah

DJIM Shariah

Mean 0.018 0.034 0.013 0.007 0.029Median 0.024 0.095 0.013 0.027 0.076Standard Deviation 0.893 0.968 0.678 1.253 0.993Sample Variance 0.798 0.936 0.460 1.570 0.986Kurtosis 0.559 2.361 15.633 2.257 3.203Skewness -0.183 -0.319 -1.529 -0.402 -0.422Range 6.321 8.856 10.306 12.695 9.388Minimum -3.581 -4.158 -5.799 -7.366 -5.294Maximum 2.740 4.698 4.507 5.329 4.094Sum 17.526 32.868 12.320 7.146 27.994Count 964.000 964.000 964.000 964.000 964.000


Table 14: Graphical Presentation for All Selected Islamic Indices from 1st Jan. 2010 to 31st Oct. 2013

The table 14, Graphical Presentation show the all selected Islamic Indices have movement of parallel to each other that means all Islamic Indices the mutual relationship with all because of all Islamic Indices work with the Shariah Responsible investment.

CONCLUSIONCONCLUSION• The results of this study strongly support the view that, there The results of this study strongly support the view that, there

is a substantial integration between Indian and International is a substantial integration between Indian and International Islamic financial markets. S&P Japan Shariah has witnessed a Islamic financial markets. S&P Japan Shariah has witnessed a greater fluctuation which has been indicated by a very high greater fluctuation which has been indicated by a very high Co-efficient of variation compared to other select indices. BSE Co-efficient of variation compared to other select indices. BSE Shariah has shown Sensitive association (Strong, Moderate, Shariah has shown Sensitive association (Strong, Moderate, Weak) with all selected Islamic indices. In the case of CAGR Weak) with all selected Islamic indices. In the case of CAGR DJIM has growing in Comparison of All Selected Islamic DJIM has growing in Comparison of All Selected Islamic Indices. In the case of volatility S&P Japan Shariah is more Indices. In the case of volatility S&P Japan Shariah is more volatile and, DJIM, S&P Europe Shariah, S&P BSE Shariah and volatile and, DJIM, S&P Europe Shariah, S&P BSE Shariah and S&P GCC Shariah are follower. In the case multi-correlation, S&P GCC Shariah are follower. In the case multi-correlation, S&P Europe Shariah and DJIM Islamic Index have highly S&P Europe Shariah and DJIM Islamic Index have highly correlated to each other. Lowest correlation indicates the correlated to each other. Lowest correlation indicates the relationship between S&P Japan Shariah & S&P Europe relationship between S&P Japan Shariah & S&P Europe Shariah Index. Shariah is not only in these selected indices but Shariah Index. Shariah is not only in these selected indices but also in the world because Islamic Finance growing the world also in the world because Islamic Finance growing the world economy. Islamic finance will be the future of world economy economy. Islamic finance will be the future of world economy because Islamic Finance works with socially responsiveness because Islamic Finance works with socially responsiveness index series. Shariah indices are working ethical and index series. Shariah indices are working ethical and sophisticated way for the investment.sophisticated way for the investment.

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effectual interrelationship among the islamic stock market of india with other emerging stock market

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