PhD

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.

Infrastructure is the backbone of modem economies; an adequate and efficient public infrastructure is essential for nations to achieve their economic growth objectives. Although the need and role of infrastructure are well recognized, little attention has been paid to the risks and pitfalls of the current infrastructure financing structures. The enormous infrastructure deficit and the increasing instances of debt restructurings, infrastructure project failures and expensive government bailouts, present enough reason for a deeper thought and action towards making infrastructure financing more robust. Through the thesis, the researcher sheds light on the problems related to such forms of financings and presents the case for an alternative model to finance infrastructure developments. The objective is to structure instruments based on Islamic risk-sharing principles and evaluate their efficacy to finance infrastructure projects. To test the viability of such instruments, we use the case study approach, whereby the cases of the Euro Tunnel and the Taiwan High Speed Rail have been simulated and backtested, to demonstrate how fortunes of these projects would have been different considering the use of the proposed instruments instead of conventional interest-bearing debt. The findings of the cash flow remodel are positive for both the cases and the introduction of the proposed instrument within the two project capital structures adds robustness to the projects. Moreover, the risk adjusted returns for investors tends to be higher in comparison to the conventional infrastructure financing structures. The findings provide a strong argument towards the use of lesser leverage for infrastructure financing and the use of risk-sharing instruments by governments to develop infrastructure. The proposed instrument while providing stability to infrastructure projects and economic benefits to its investors, is Shariah compliant or in line with the tenets of Islamic law and thus can be used by Shariah conscious investors to generate superior returns and by policy makers to further build the Islamic capital markets.

The Global Risk Report (2021) identifies ESG risks as the number one risk faced by the global economy. Banks have contributed to this risk and can also contribute to mitigating it. High exposure of Banks to ESG risks will contribute to climate disaster, which in turn will have financial risk implications for banks in the form of disaster events risks and energy transition risks. Depositors can discipline banks in reducing and preferably eliminating their ESG risks through enforcing market discipline by deposit withdrawal. This thesis investigates the extent to which deposit withdrawal works as market discipline against ESG risks in the banks of the OIC region. The thesis also examines the impact of financial risk represented by CAMELS variables on depositors' behavior. The generalized method of moments (System GMM estimator) is used for dynamic panel data models, as well as a sample from 65 countries over the period 2007 to 2016. Our findings indicate that depositors react significantly to environmental and governance risks while depositors' discipline does not exist with social risks. With regard to financial risks, our findings suggest weak evidence of market discipline. However, regressing CAMELS components separately provides better results and understanding than regressing CAMELS components collectively. In the OIC region, the study indicates that depositors tend to be sensitive to changes in capital adequacy, bank earnings and ESG risks, while in the non-OIC region, depositors are only sensitive to management quality.

Technology startups (TSs) are critical to develop economic capacity, support innovation and stimulate entrepreneurial spirit In a nation. As TSs embark on innovative and disruptive journeys, they face their biggest challenge: financing. This study aims to examine the determinants of financing among TSs in Malaysia while critically examining the role of Islamic Finance. The study adopts a triangulation methodological approach, which consists of questionnaire survey and semi-structured interviews. It focuses on Malaysian technology startups, entrepreneurs and their financing needs mainly at two stages: the early stage and the later stage. The study examines the following dependent variables as financing determinants: Entrepreneurs' Profiles (EP), Ethnic Culture (EC), innovation (IN) and Government Interventions (GI). It also examines the role of Islamic Finance among TSs. Binary regression analysis was used to analyse the data collected from the questionnaire survey, respectively grounded theory was employed to analyse interview survey data ...

Although literature on shadow economy has been growing, the examination is scarce in the case of developing countries, especially the Organization of Islamic Cooperation (OIC) economies. In this study, we develop various testable hypotheses related to shadow economy. We investigate the determinants of shadow economy across a large sample of 141 countries and examine whether it varies across OIC (42) and non-OIC (99) countries. The average size of the shadow economy in OIC countries is 34.36% of gross domestic product (GDP) while it is 30.57% of GDP in non-OlC economies. The approach of exploring various definitions, historical development, types, Islamic viewpoint and the determining factors behind people's preference to join shadow economy is adopted in order to provide a deeper understanding of shadow economy. As far as our first objective Is concerned, we explored the determinants of shadow economy in OIC and non-OIC countries (1995-2015). Our results show that economic growth and institutional variables have negative association with shadow economy in both types of countries whereas government expenditure has a positive effect on shadow economy in both groups ...

This study empirically investigates the stochastic corporate coupon bond pricing model proposed by Baaquie (2020b) and the pioneering structural risky bond pricing model proposed by Merton (1974). Merton's risky zero-coupon bond pricing model is converted into a portfolio of zeros to study corporate coupon bonds. The seminal work of Merton (1974) is considered as the backbone of corporate bond pricing. Merton's model is based on the generalization of Black and Scholes (1973) option pricing theory. The coupon bond pricing model, proposed by Baaquie (2020b), is based on Merton's bond pricing theory, but coupons are stochastic. Hence, we can call it a stochastic coupon bond pricing model where coupon varies from payment to payment based on the issuer's performance. The proposed model of stochastic coupons has a built-in hedge for the issuer and has the feature of profit and loss sharing between investor and issuer, making it a viable instrument for Islamic finance. The model can be calibrated and tested using market data. This thesis is structured into six chapters, including an introductory chapter, a review chapter, three core chapters, and a concluding chapter. The introductory chapter highlights the motivation, problem statement, and objectives of this study. In review chapter, theoretical and empirical works along with derivation of Merton (1974) and Baaquie (2020b) are reviewed. In conclusion, a summary of the thesis, policy recommendation, limitation, and future directions are discussed. In the third chapter of the thesis, we investigate the following three questions. First, how can one use the proposed model for an empirical study of fixed coupon bonds, since apparently, the model implies stochastic coupons being paid continuously? Second, how the newly introduced parameters, three exogenous parameters - market time and firm's effective valuation and two endogenous parameters - stochastic coupon and firm value volatility, behave for different categories of the bonds and contribute to the improvement of the model's fit? Third, does the stochastic coupon model estimate the bonds' market price more accurately compared to Merton's model? To answer these questions, we have shown how to calibrate and test the stochastic corporate coupon bond pricing model along with newly introduced parameters using a sample of fixed coupon bonds issued by the US corporations. Estimated coupon bond prices from the stochastic model are then compared with the estimated prices from the extended version, portfolio of zeros, of the Merton model.

In spite of the expanding number of studies investigating the effect of institutional quality on capital flows, a very few attempts has been made to investigate the impact of capital flows on the institutional quality of host countries.This study investigates the role of capital flows on the institutional infrastructure of the OIC countries, which are divided into three separate essays. The first essay investigates the impact of the official development assistance (ODA) on the institutional development of the OIC counties. The research uses system GMM, and the data for this study is obtained from 40 OIC countries for the three-year average period from 1991 to 2016. Empirical findings suggest that aid reduces the Institutional quality for the aid recipient countries. For robustness test and heterogeneous relationship among aid recipient countries, this study uses panel quantile regression and finds that foreign aid generally reduces Institutional quality, and its reduction effect is greater in less institutionally developed countries ...

Theoretically, one of the ways governments that aim to improve economic growth in their countries is by increasing expenditure on human capital. However, some empirical evidence from OIC countries do not support the finding that expenditure on the two most important aspects of human capital (expenditure on education and health) affects growth positively. One of the plausible reasons for the observed unusual finding could be the presence of moderating variables. Therefore, this study investigates the relevance and applicability of one such moderating variable, namely the quality of institutions, given the relatively low global ranking of OIC countries in terms of institutional quality. This study contributes to the new institutional economics literature by discovering that some institutional quality variables determine the way human capital expenditure affects economic growth. This study uses the methodology of panel data analysis and interaction graph plots. Interaction graph plots show the marginal effect of a continuous variable on another continuous variable. Without the inclusion of interaction terms, we find that, on average, in OIC countries, the effect of government education expenditure (GEE) on growth is insignificant while the effect of government health expenditure (GHE) on growth is either insignificant or significant and negative. The interaction graph plots show the effect of government human capital expenditure on growth at different levels of growth. When we consider the marginal effect of institutional quality, we find that generally, better bureaucracy quality, control of corruption, government effectiveness, law & order and rule of law augment the positive effect of GEE on growth. We also find that better government effectiveness and law & order augment the positive effect of GHE on growth.

The Islamic banking industry has grown and gained a remarkable position in the global share of the financial sector. This growth requires a strong emphasis on intellectual capital (IC) that includes dedicated human capital, reliable structural capital, and a committed and long lasting relational capital among participants in the Islamic banking ecosystem. The study aims is to examine and compare the intellectual capital disclosure (ICD) practices of Islamic banks under different reporting regimes. The IFRS issued by IASB and FAS issued by AAOIFI are the two commonly used standards for financial repoting by Islamic banks. The findings indicate that, on average, there is not much difference between IFSB and AAOIFI scores (IASB:57.25% vs AAOIFI: 56.58%); in fact, most of IFSB-based banks performed better that AAOIFI-based banks throughout the period of study except in first year (i.e. 2012). The study also examined the relationship of corporate governance and the moderating role of Shariah committee with the extent of ICD practices among the Islamic banks. Several corporate governance mechanisms such as board size, number of board meetings, board gender, board independence, board expertise, audit committee size, number of audit committee meeting, audit committee gender, audit committee independence, and audit committee expertise were used as dependent variables. While, selected Shariah committee characteristics that, included Shariah committee size and Shariah committee gender were the moderating variables and firm characteristics were used as control variables to control for cross-sectional differences associated with ICD. The study applied the prominent resourced-based, agency and legitimacy theories and formulated twenty-three (23) hypotheses. Based on a total sample of 231 Islamic banks in four countries, namely Malaysia, Brunei, Bahrain and Jordan covering year 2012 to 2018, the findings revealed that having an effective governance structure is essential, as it is able to influence the ICD practices of Islamic banks. Specifically, the study found that ICD practices of Islamic banks is significantly and positively associated with board size, board independence, audit committee gender and audit committee independence. The results suggest that larger or reasonable board size tends to have varied skills and expertise among the board members, resulting in more information by allowing for greater diversity of backgrounds and viewpoints.

Financially distressed companies always bring about enormous financial and economic losses to many stakeholders, such as management, stockholders, employees and customers together with a substantial social and economic cost to the country. Therefore, a distress prediction model that can predict the event and identify the determinants in advance would serve to reduce such losses by providing a pre-warning signal to stakeholders. Preventive actions can then be taken by stakeholders if they can obtain early warning signal of probable failure that will lead to the efficient allocation of available resources to reduce losses. For these reasons, identifying the financial distress determinants that can give accurate prediction has become an essential aspect of finance. Our study will try to identify the financial distress determinants in Malaysia by applying logistic regression analysis (LRA) method together with multivariate discriminant analysis (MDA) and artificial intelligence algorithm (ANN) for robustness. Twenty-one independent variables were selected in our study that can be categorised as financial ratio variables, market variables and non-financial data variables. Data samples were derived from 158 Malaysian public listed companies and the assessment period was from the year 2001 until 2012 ...

This paper attempts to examine the relationship of financial development with environmental quality, incorporating the role of institutional quality. There are three objectives of this study which are: to examine the impact of financial development on environmental quality and to ascertain the existence of Environmental Kuznets Curve (EKC); to examine the role of institutional quality in the relationship; and to highlight differences, if any, between Islamic countries and non-Islamic countries on the said relationship. This research applies generalized method of moments (GMM) for estimation which is the most suitable estimator to manage the unobserved fixed-effects and endogeneity issue between dependent and independent variables. Average 3-years data is used from World Development Indicator of World Bank and ICRG database of 72 countries globally and with period ranging from of 1980 to 2012. The dependent variable is environmental quality while independent variables are financial development, GDP per capita, energy use, trade openness and institutional quality. The results from the GMM estimation suggests that financial development have significant impact on environmental quality. However, the direction of the impact is inconsistent, depending on the type of emission. In addition, there is an evidence of EKC relationship between environmental quality and income. Energy use has a significant and positive impact on environmental quality, although trade openness has no significant impact on environmental quality. The study further analyses the role of institutional quality on these relationships and proves that institutional quality does play a role in reinforcing financial development to improve environmental quality. Nonetheless, the degree of impact varies with the strength of the institutional quality.

Islamic finance is often criticized for its non-practicality in today's modern economics. The principles of promoting exchange and prohibition of interest-rate based transactions are understood as endorsing risk sharing economic system is said to be incompatible in an open and modern market like today. This view was contrary to the spirit of the 2012 Kuala Lumpur Declaration, where Islamic-scholars, jurisprudents, and economists all vouched to force the enactment of risk sharing principle into our economic system ...

Over the past three decades, the Malaysian economy has been experiencing economic growth, but at the same time inundated by a deterioration of overall fiscal balance and consequently a rise in national debt. As a country that has faced persistent fiscal deficits for the last 16 years, Malaysia now needs more fiscal space and a plausible fiscal sustainability plan that would place its economy on a trajectory to a higher growth path. Its budget deficit in 2013 stood at 4% of GDP while federal government debt stands at 53% of GDP ...