The option pricing model introduced by Black-Scholes in 1974 gained wide acceptance for its simplicity but was inefficient in pricing options as it relied on implied volatility. Despite the evolution of various versions of option pricing models since their seminal work, little progress had been documented on the use of implied volatility, leaving Black-Scholes to be a mathematical identity to calculate the instantaneous implied volatility as it fails to be an efficient pricing equation. Although interpreted as market expectation of future volatility of stocks, implied volatility is literally a black box that captures market information that is not specifically known yet also internally inconsistent (e.g., having a different implied volatility surface for put and call options). The four main objectives of this thesis are: first, to empirically studying the performance of the Oscillator model developed by Baaquie (2019) and examining its efficiency in pricing options as compared to Black-Scholes model. The Oscillator model has only two sets of parameters in addition to the classical form of Black-Scholes; one to model for the underlying stochastic evolution of the stock price, and the second are of market time. Market time is a behavioural parameter introduced by Baaquie and Bouchaud (2004) which scales the time to maturity to capture the market sentiment of the underlying instrument. This thesis also introduced an alternative version of Black-Scholes by adjusting it for market time. Second, the thesis tested the put-call parity violation. Third, the thesis tested three main option hedging Greeks; Delta, Gamma, and Theta, which are partial differentiations of the option pricing equation. Fourth, the thesis discussed the calibrated output and parameters' behaviour to provide insights into the implied volatility information content and gain new understanding of the parametric gap of Black-Scholes particularly in the light of the Oscillator and Black-Scholes models adjusted for market time.

This chapter provides discussion on a study that investigates the perceptions on shariah governance practices among Malaysian Islamic financial institutions. The chapter explores the effectiveness of implementation of Shariah Governance Framework among Malaysian IFIs with the focus on their level of commitment, the challenges and suggestions to further improve the effectiveness of implementation of this framework. The system of corporate control, effective and efficient governance that is consistent with shariah guidance has been an important agenda for Islamic Financial Institutions (IFIs) since the existence ofIslamic Finance in Malaysia. This is especially important in light of rapid growth in Islamic Finance industry not only in Malaysia but globally. The well-functioning Islamic finance industry can only be sustained if there is good corporate governance practice by IFIs that comply with the shariah guidance.

Islamic banking and Finance (IBF) provides products and services guided by the Shariah. Therefore, they are supposed to be different from their conventional counterparts. Islamic deposit rates should be different from conventional deposit rates. Islamic banking profit rates are supposedly less risky due to risksharing attribute embedded in their structure as compared to the conventional banking interest rates on similar-risk investment products. This paper addresses this concern by examining the differences in the monthly fixed deposit rates of conventional and investment deposit rates of Islamic banks and finance companies in Malaysia for the period from January 1994 to December 2012 and determines the causality relationship between profit rates and interest rates on these investments. The findings suggest that profit rates of Islamic banks are significantly linked with interest rates of conventional banks.

In this paper, we examine the interrelations between bank lending, macroeconomic conditions and financial uncertainty for an emerging economy, Malaysia. Adopting time series techniques of cointegration, causality and vector autoregressions (VARs), we arrive at the following main results. We note long run positive relations between real output and both real bank credits and real stock prices. However, with slow adjustment of real output in responses to credit expansion or stock price increase and weak exogeneity of the latter two variables, both credits and stock prices can be persistently higher than their fundamental values. The phenomenon can be detrimental since it heightens market uncertainty. Our results suggest that heightened market uncertainty is negatively related to output in the long run and, on the basis of dynamics analysis, it is likely to depress real output, real credit and real stock prices. At the same time, we note significant dynamic impacts of interest rate shocks on other variables. Taken together, these results have important implications for macroeconomic performance and stability for the case of Malaysi

This paper examines the existence of behavioural finance aspects among Malaysian fund managers. We identify behavioural biases of loss aversion, disposition effect and illusion of control. We also study the endowment effect and mental accounting which rooted in the Prospect Theory. We developed two-parts experiments i.e. investment-related decisions and general behavioural questions. The study revealed that Malaysian fund managers are prone to behavioural biases in investment decisions and general aspects as well. We also analysed the data in comparison with demographical information such as age, gender, years of experience and investing style. We find that the younger fund managers tend to experience behavioural biases more than the elders. Female fund managers prone to loss aversion and disposition effect than male fund managers, while male fund managers experience a moderately higher percentage in illusion of control than the female counterpart.

The topic of poverty and inequality is still a central discussion among the economist. The current efforts in fighting poverty and inequality, which are considered unsuccessful, has motivated the economist and policy makers to find new ideas and strategies in combatting poverty and inequality. At the same time, the area of economic freedom is increasingly being discussed and linked with other major economic areas. This paper aims to examine the relationship between economic freedom and poverty as well as inequality ...

An effective system of rules, practices and processes by which Islamic Financial Institutions (IFIs) are directed and controlled to ensure their business operations are Shariah-compliant, which has important implications on their reputation, Shariah governance and the future growth of Islamic finance industry. Sixteen Chairmen of the Shariah Committees of Islamic financial institutions in Malaysia were interviewed on the challenges faced in carrying out their responsibilities and theri views on effective Shariah Committees. This paper summarizes the various challenges faced by Shariah committees in Islamic financial institutions in Malaysia.

This study extends the bank ownership database of Claessens and van Horen (2015) to investigate the role of state-owned and foreign banks in the development of private credit markets in countries with a dual banking system. The enhanced database contains state and foreign ownership information of 1,038 banks operating in 29 countries, categorised as either Islamic or non-Islamic. To begin, this study uses the database to identify the bank ownership patterns in the dual banking countries. The data reveals that the ownership structure of the Islamic banking industry changes in a different manner from that of their conventional counterpart. More specifically, it shows that, in line with financial liberalisation policies, the presence of state-owned and foreign conventional banks decreases and increases, respectively. On contrary, Islamic banks with both types of ownership become more prevalent over time. Further, the data is used to examine how state-owned and foreign bank presence affects private credit in the countries. To do so, this study employs a cross-country approach that regresses private credit to GDP ratios against the shares of total bank assets held by state-owned and foreign banks. In the regressions, the asset shares are measured both in total and by bank types (i.e., Islamic versus conventional banks). The regressions are run separately using data average over the full sample period (1995-2017), and over the three subsample periods that are divided into the pre-crisis (1995-2006), during-crisis (2007-2009), and post-crisis (2010-2017) periods. When measuring bank ownership shares in total, this study finds that the presence of state-owned banks is associated with less credit to the private sector in support of the political view. This negative relationship is, however, found to be insignificant during the crisis period. In terms of magnitude, the effect, when significant, is somewhat larger in the post-crisis period than in the pre-crisis and the full sample period. On the other hand, this study does not find significant evidence that the presence of foreign banks could adversely affect private credit markets either in the full sample period or in the subsample periods.

The ability of banks in giving out loans and investments depends very much on their ability of attracting deposits. Unlike its conventional counterpart, Islamic principles forbid Islamic banks to take any interest-related income amid the fact that deposits are an important source of fund for its operational and financing. Consequently, the risk of deposit withdrawal by depositors is an important aspect that should be well managed in both conventional and Islamic banking system. Therefore, the objective of this study is to examine the effect of selected economic and bank specific variables on deposits placed at the Islamic and conventional banks ...

The main objective of this study is to identify the main determinants of the Islamic banks' performance in Gulf Cooperation Council (GCC) regions. The research uses both static model (fixed effects and random effects) and Generalized method of Moments (GMM). The data for this study are obtained from the annual reports of 29 Islamic banks from GCC countries using Bankscope database for the period from 2005 to 2013. The empirical findings reveal that Islamic banks' specific factors such as the equity financing and bank size are positive and statistically significant to the profitability of Islamic banks. The operating efficiency ratio is negatively and statistically significant to return on asset.

This paper contradicts the existence of a universal value anomaly by studying Malaysia, a country with a unique institutional setting. We investigate this counter-example to attribute the anomaly to: 1) the leverage effect of value firms; 2) the investment pattern of growth firms; 3) the economic environment. We find that the value premium cannot be ascribed solely to risk as it is time varying and dependent on the attributes of the companies. Our results illustrate that small cap value firms perform relatively well during favourable economic conditions. In contrast, large cap growth firms perform better than their counterparts (i.e., large cap value firms) in economic upturns as they are preferentially awarded projects to revive the nation's growth.

This study aims to dispel the myth of the value anomaly by employing the logic of the well-known Austrian British philosopher Sir Karl Raimund Popper, who espoused that positive outcomes of empirical observation cannot confirm an anomaly, such as value premium (Popper, 1953).

Capital structure serves as an important device for mitigation of agency conflicts and, although firms combine debt and cash dividends to address the agency conflicts, debt is preferred as a bonding device by many managers due to its lower cost as compared to equity (John, Knyazeva & Knyazeva, 2015). However, shariah-compliant firms (SCF) cannot use this device due to prohibition of interest-bearing loans in Islam. In this scenario, the dividend payout policy becomes a highly important tool of corporate governance for shariah-compliant investors. Moreover, the managers of these firms cannot maintain stable dividends by issuing bonds and, therefore, the dividend policy of such firms would be different. This chapter highlights the dividend payout behaviour of SCF by comparing them to conventional firms.

Cost efficiency plays a significant role in bank risk taking behaviour. This paper examines the effect of cost efficiency on the liquidity risk of Islamic banks and conventional banks in 16 OIC countries from 1999 to 2013. The findings suggest that cost efficiency has a positive effect on liquidity risk. Other significant factors of liquidity risk include capital, bank specialization, credit risk, profitability, size, GDP and inflation whereas market concentration is not significant contributor to banking liquidity risk. There is weak evidence to support the notion that Islamic banks have higher level of liquidity risk than conventional banks. The findings imply the need to provide liquidity, probably through a well-functioning money market to lower liquidity risk in banking.

The paper explores the economic and security dependence of an entity on others as reasons for the inability to implement military intervention by applying forecast error variance decomposition (FEVD) on economic and security data. Specifically, the paper evaluates the economic and security dependence of the Organization for Islamic Cooperation (OIC) on the United Nations (UN) Security Council to understand OIC's inability to initiate military intervention in OIC member countries ...

Market discipline is one of the main pillars of stability and resiliency in the banking system. The mechanism of market discipline primarily relies on the role of depositors who receive timely information and act accordingly through their respective accounts. In this study, we use generalized method of moments panel technique for 44 Islamic banks across different regions to research the presence of market discipline in the global Islamic banking system, focusing on the behaviour of the PSIA holders and their role in the governance of Islamic banks. These results have a significant policy implication in reviewing the framework governing the Islamic banks.

This study examines the impact of ethical and Shariah screening on idiosyncratic risk, performance and dividend policy decisions for US market for the period 2006-2015. A unique dataset is utilized to construct representative portfolios of Socially Responsible Investing (SRI), Shariah compliant investment and Market (proxy). The existing literature suggests that constraints on stock selection imposed by screening may limit investment universe and make faith based portfolios sub-optimal. Therefore, the investors who want to follow their religious or social beliefs need to incur cost of their values. Our results reveal that Shariah compliant investors are slightly disadvantaged in terms of idiosyncratic risk. However, they pay the price of holding religious beliefs by accepting lower risk-return trade off while SRI investors bear no such cost. Moreover, that there is not much variation in dividend policy of the faith based portfolios as compared to market proxy portfolio and good corporate governance promotes dividend payment for the sample portfolios. Furthermore, the firms with low idiosyncratic risk, low financial constraints, high book-to-market-assets ratio, high size and earned equity tend to pay higher dividends. Finally, it had been found that Shariah firms, unlike the market and SRI firms who prefer retaining excess cash, utilize high free cash flows to pay dividends to reduce agency conflicts.

This paper examines the long run relationship between Vietnam stock market and her ASEAN partners like Malaysia, Singapore, Thailand, Indonesia and the Philippines. The paper uses the weekly data from July 2006 till February 2014 and run through an analyzed using time series techniques in order to test for cointegration of Vietnam stock market with ASEAN members. Eagle-Granger, Johansen-Jeselius (JJ), and Vector Error Correction Model (VECM) methods are used in analyzing data. The results obtained from JJ test find at most one cointegration among ASEAN members ...

This paper investigates the target capital structure adjustment by Malaysia and Singapore, with a view to determine whether they exhibit similar behaviour. Firms may temporarily diverge from their target capital structure but seek to return optimal capital structure when indications of crisis are seen as well as in the aftermath of a crisis. Firms which are not on their optimum capital structure face high detrimental costs for being in such a position ...

In presence of the market frictions, firms aim to attain target capital structure by making strategic choices towards re-engineering the leverage. These choices influence not only firm’s investment patterns, capital costs and expected returns but also lead to conflict of interest among the stakeholders. The dynamic market forces make targeting a continuous exercise for the firm, as it strives to make optimal financing decisions to raise its value and reduce the risk of bankruptcy. An occurrence of acute financial crisis disturbs the capital structure and firms may foresee this and try to adjust. If adjustment is seen prior to a crisis in favour of higher leverage and moving away from the optimum capital structure, then it may signify cheaper adjusting costs and greater access to the debt financing. If adjustment takes place post crisis, then it means that valuable lessons are learnt and steps are taken to attain the optimum capital structure.

This paper investigates the effect of political patronage on firms' capital structure. The evidence is from Malaysia, a country characterised by relationship-capitalism, and covers 1988 to 2009. Using a system GMM estimator we find firms set leverage targets and adjust towards them following deviations at the rate of 28% per annum. Next, we construct a natural experiment and use a difference-in-differences model to investigate if the strategic financing decisions of politically patronised firms differ from non-connected firms after an exogenous shock caused by the 1997 Asian crisis. Our results unambiguously demonstrate a significant difference in the capital structure of patronised firms relative to non-connected firms following the exogenous shock but only for the crisis period 1998–2001. After 2002 the capital structures of patronised and non-connected firms are statistically equivalent.