Chapter in Book

This chapter attempts to analyse the extent of financial integration of Islamic stock markets in two developed (the US and Japan) and two developing countries (China and India). The study takes the perspectives of the Malaysian Islamic investors in making their decisions about portfolio diversification, risk management and asset allocation. Despite the growing interest in Islamic finance, there are a few empirical studies investigating integration of Islamic stock markets. As a result, there is a certain gap in the literature pertaining to this area of research. By applying recent relevant techniques such as MGARCH-DCC and wavelets (both CWT and MODWT) ...

Fund managers and investors began many years ago to take into account the Islamic component of the GCC stock markets in order to benefit from the diversification opportunities offered by the Islamic stock markets for their investments in equity markets. This can improve the return and reduce the risk associated with their investments. However, these investors are also concerned about linkage aspects of those markets in relation with the international ones regarding integration and shock transmission, in particular, during the financial crisis.

A series of financial crises in recent times resulted in an increase in contagion and correlations between assets making investments in conventional securities a little more unsafe. Therefore, global investors started looking for alternative assets to diversify their portfolios. One of the alternative assets that has been growing very fast over the recent period is the Islamic financial sectors which has been growing at an average rate of 15 percent to 20 percent per annum over the past decade. The risk-return profile of Islamic products, such as Islamic stocks, is expected to be different from that of conventional stocks.