A Study on Sharīʿah Index and General Index

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Volatility and Information Behavior:

A Study on Sharīʿah Index and General Index

Mohammad Imdadul Haque

Associate Professor, College of Business Administration, Prince Sattam bin Abdulaziz University, Saudi Arabia

Afsal Ellath Meethal

Assistant Professor, School of Management and Business Studies, Mahatma Gandhi University, India

ABSTRACT. The fact that there is an increased demand for Sharīʿah-based financial products demands modeling the risk-return structures of such products for the benefits of investors, practitioners, and policymakers. This study attempts to discover the superiority of information and volatility patterns of Sharīʿah-based indices over the general index traded in the Malaysian stock exchange. The Vector Error Correction Model combined with EGARCH is administered to achieve the objectives of this study. The findings imply the existence of a long-term equilibrium relationship between the two types of stocks and a contemporaneous as well as a bi-directional lead-lag association between a Sharīʿah-based index and the general index. Volatility spillover and mixed levels of persistence are also identified. It is also noticed that the information superiority cannot be attributed to any of these indices. The study concludes that there is not much difference between a Sharīʿah-based index and a general index in terms of performance.

KEYWORDS: Lead-lag relationship, Sharīʿah-based index, VECM, EGARCH, Volatility.

JELCLASSIFICATION: C58, G11 KAUJIECLASSIFICATION: I43

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1. Introduction

Muslims constituted 23.2% of the total population in 2017 (Central Intelligence Agency, 2018). This amounts to roughly 1.7 billion people. The world’s total Muslim population is expected to increase by about 35% in the coming 20 years leading to around 2.2 billion people by 2030 (Pew Research Center, 2011, p. 13). Meanwhile, the global Islamic finance industry crossed 2 trillion US dollars in 2017 with an 8.3% growth in assets in 2017 (IFSB, 2018, p. 9).

In spite of many Sharīʿah-based investment options available since the 1970s,the Islamic indices (a synonym of Sharīʿah-based investment) are still in their stage of development both in terms of growth and studies. Interestingly, the Sharīʿah-based investments are not restricted to Muslims only. These Sharīʿah-based investments arean option for diversi- fying investment portfolio (Medhioub & Chaffai, 2016, p. 271). They also provide options for those who prefer ethical investments as they refrain them- selves from investing in illegal and immoral activities (based on Islamic point of view), like gambling and alcohol (Abu Bakar & Ali, 2014, p. 97).

Despite a decent growth in Islamic investment funds, extensive research on the performance of these funds is not up to date. This has been stated in various researches, namely Reddy and Fu (2014), and Rana and Akhter (2015). There may be a general per- ception among investors that Islamic funds and conventional funds differ in terms of returns. An insight into the difference in the performance of Islamic indices and conventional indices is not only important for the confidence of active investors of Islamic funds, but also for attracting new investors.

Researchers like al-Baity and Ahmad (2008), and Lean, Mishra, and Smyth (2015, p. 14) have established that both these indices perform similarly.

However, it is noteworthy that mechanisms and products are the same in both Sharīʿah-based Islamic funds and conventional funds (Medhioub & Chaffai, 2016, p. 270).

There exists a substantial amount of empirical work exploring the dynamics among different kinds of markets, indices, and sectors to determine which one is dominant about information. A diverse range of methodology has been used in these studies, but the key result indicates that the main effect goes from

one market to another, leaving opportunities for arbi- trages at least for some time. Most of such investiga- tions are reported between spot and derivatives or between two different markets.

The lead-lag relation between price movements of the two markets illustrates the pace at which a particular market mirrors new information related to another market. In a way, it reflects on how the two markets are related. In a frictionless context, both markets are not auto cross-correlated, rather contem- poraneously correlated. Nevertheless, if any of the markets responds more rapidly compared to the other, a lead-lag relation is to be developed. Market participants capitalize on lead-lag patterns for arbitrage opportunities.

No arbitrage opportunities exist in perfect markets, but that is not the case in imperfect markets. As private information and transaction costs are involved in imperfect markets, there is a tradeoff between the two liquidity parameters, namely low cost and high leverage (De Jong & Donders, 1998, p. 339). Several technical reasons have been evolved to support the view that a particular market may lead other markets.

For example, if the derivatives market instantaneous- ly reflects new information and the stocks within the index trade rarely, the observed derivatives would accordingly lead observed spot index. However, Roll (1984, p. 1134) noted that the economic significance of this behavior was none. Further, in a narrowly based index, due to bid-ask bouncing, there is a negative serial correlation in individual stock returns (Stoll &Whaley, 1990, p. 444). This outcome re- duced the positive serial correlation in the index returns brought by occasional trading and may conceal the real association among index and options or futures’ returns.

This paper examines the lead-lag relationship between the Sharīʿah-based index and general index in the Malaysian stock exchange, Bursa Malaysia. Ma- laysia is one of the key players in the development of Islamic banking, Islamic capital markets, and takāful.

Malaysia has 11 takāful operators two of which be- long to foreign operators (Fauzi et al., 2016, p. 73).

The takāful market has been steadily growing in spite of the world economic crisis. Within the ASEAN (Association of Southeast Asian Nations), Malaysia

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has around seventy-one percent of the total gross takāful contributions. Excluding oil-rich economies of the Middle East, Malaysia accounts roughly for 40% of the global Islamic finance business. As home to the highest number of public listed companies (PLCs), Malaysia has the largest bond market in ASEAN countries (Sidlo, 2017, pp. 7-10). To recog- nize the significant achievements in the Malaysian capital market, it was upgraded to an Advanced Emerging Market in the FTSE Global Equity Index Series in 2013 (Capital Markets Malaysia, 2015, p.

3). It has a robust multi-religious and multi-cultural society. In view of the credentials in both Islamic finance and general capital market operations, a study on the Malaysian market is justifiable. The same suc- cess story of Islamic finance can also be replicated in other countries.

The objective of this paper is to investigate if any information superiority is attributed to Sharīʿah-based index or general index over the other as investigated in some other similar contexts. Information superiority is the ability of one market to absorb information better and faster than the other market. This would offer an extra edge of reflecting the market senti- ments and movements. This superiority behavior, in general, would be useful for common investors with- out much research backing to take better investment decisions. In addition, the study examines the volatility patterns in the market. The equilibrium relation is established with the help of co-integration and error correction models. This will further uncover the relationship between the two types of stocks, as it examines the equilibrium relationship of the variables from short and long-term levels. The practical implication of this study is to compare Sharīʿah-based indices with general indices in terms of their information superiority and risk behaviors.

The remaining of this paper is organized as fol- lows. Section 2 provides a short review of past literature on Sharīʿah-based stocks, indices, and mutual funds. Research methodology and data specifications are given in section 3 and section 4, respectively.

Section 5 discusses the results and section 6 concludes the paper.

2. Literature Review

Many works had already been carried out to study the relationship between the Sharīʿah-compliant financial

products and the conventional financial products of various countries. Studying the Malaysian indices from April 1999 to December 2005, al-Baity and Ahmad (2008, pp. 40-42) found no indication of any significant statistical difference in risk-adjusted returns between Islamic and conventional stock market indices. They used cointegration and causality in their analysis. The study further indicated at bidirectional causality in the short run and that both the indices moved together in the long run. As both the indices behaved in a similar pattern, one can be predicted based on the other.

Merdad, Hassan, and al-Henawi (2010, p. 157 &

190) analyzed 28 mutual funds managed by HSBC Saudi Arabia Limited from January 2003 to January 2010 using various performance measures like Sharpe and Treynor. The study was divided into full, bull, bearish, and financial crisis periods. The study asserted that conventional funds outperform Islamic funds during the full period and the bullish period, while in the bearish and financial crisis periods conventional funds underperform the Islamic funds. Dur- ing the period of financial crisis, the systematic risk for Islamic funds was comparatively lower than their conventional counterpart. They viewed that Islamic mutual funds offer hedging opportunities for investors especially during economic downturns because of the stricter Sharīʿah screening of the stocks.

Mansor and Bhatti (2011, pp. 29-30) found a strong relationship between Islamic and conventional mutual fund portfolios in Malaysia. The study found that Islamic portfolio, when compared to the conventional portfolio, had somewhat fewer returns and higher risk. This higher risk in terms of standard deviation implied that Islamic portfolio had relatively higher volatility and faster reaction to the market than its conventional counterpart. Though both these portfolios were influenced by the market, the Islamic portfolio was closely relatively more mirrored to the market movement. Further, the returns on Sharīʿah and conventional mutual fund portfolios were higher than that of the KLCI index, proxy for the market returns, from January 1996 to April 2009.

Hassan and Girard (2010, p. 1) compared seven indices of Dow Jones Islamic Market Index (DJIM) with their non-Islamic counterparts using Sharpe, Treynor, Jensen and Fama’s selectivity, net selectivity, and diversification. The study used cointegration

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to examine how the Islamic indices comparatively performed in relation to their non-Islamic counterparts from January 1996 to December 2005. For the overall period, the two groups of indexes were poorly integrated. The results stated that there was no difference between Islamic and non-Islamic indices. The Dow Jones Islamic indices outperformed their conventional counterparts from 1996 to 2000 and underperformed from 2001 to 2005. Generally, reward to risk and diversification were alike for both the type of indices.

In another study on Malaysia from January 2000 to October 2011, Karim, Datip, and Shukri (2014, p.

1) studied the dynamic causality between the Islamic stock market and conventional stock market using risk-adjusted return measurements. They divided their study period into full period, pre-subprime, subprime, and post-subprime financial crisis period.

They used cointegration and causality in their analysis. The result shows that the Sharīʿah-based stocks produce more returns compared to the conventional in all sample periods and there is bidirectional causality in the short run between them.

Hartono, Soekarno and Damayanti (2014, p. 74) assessed the performance of Islamic and Convention- al equity funds in Indonesia using a sample consist- ing of 36 equity funds. Using ANOVA, they found that the performance of Islamic equity fund is not significantly different from the conventional equity fund. They asserted that out of the Sharpe index rating portfolio, the modified snail trail portfolio, and the Morningstar portfolio, only the latter did not outperform the benchmark portfolios.

Habib and Islam (2014, p. 231) studied the performance of MSCI India Islamic index and MSCI Malaysia Islamic index with their corresponding conventional Indices from 2003 to 2013. The results showed that Islamic indices underperformed in India, but they outperformed the conventional index in Ma- laysia. Nevertheless, during the period of financial crisis, the Islamic index performed better than the conventional indices in both countries. The study further reported that in terms of mean abnormal returns, there was no significant difference between Islamic indices and conventional indices.

Reddy and Fu (2014, pp. 165-166) suggested that there was a significant difference in the performance

of Sharīʿah-compliant stocks and the conventional stocks listed on the Australian Stock Exchange (ASX) from 2001 to 2013. Using Mann Whitney U- Test and Independent Samples test, they concluded that the Sharīʿah-compliant stocks were riskier. They also added that there was a strong relationship between the returns of Sharīʿah-compliant stocks and the conventional stocks. The relationship was analyzed using OLS regression and it found that the returns of Sharīʿah stocks were higher than the conventional ones.

Abu Bakar and Ali (2014, p. 101) compared the performance of 107 Sharīʿah-based and conventional securities of Malaysia from January 1990 to Decem- ber 2011. They divided their period of study into pre, during and post Asian financial crisis, and the subprime mortgage crisis period. They used Jensen Al- pha and Treynor Index and found that conventional portfolios were more volatile during all the four periods and the overall period. The mean risk-adjusted returns showed that both Sharīʿah-based and conventional portfolios performed equally in all the catego- ries of the mentioned period.

Rana and Akhter (2015, p. 15) in their study used KMI-30 (Islamic index) and KSE-100 (conventional index) of Pakistan. They used the method of GARCH-M for the data from July 2008 to November 2013. They found that the Islamic indices were not affected by interest rate volatility whereas the conventional indices got affected. However, exchange rate volatility was significant for both the types of indices. The study also found that there was no significant difference in terms of performance and movements of both indices. Both the indices behaved in the same direction in the short as well as the long run. The study also concluded that in terms of returns, the Sharīʿah-compliant stocks underperformed compared to their conventional counterpart.

Lean et al. (2015, p. 18) used the data from Janu- ary 1996 to December 2014 of Dow Jones Islamic market index and found that there were weak chances to earn abnormal profits from investments in Islamic markets. The study used the weak form of Efficiency Market Hypothesis. The rejection of it implies that inefficient markets can make profits by forecasting future stock prices based on past trends. The study established that the performance of Islamic indices was not better than conventional indices after adjusting

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for risk except for the downturn period (2009-2012).

Wherein, few Islamic indices performed better than conventional indices.

Medhioub and Chaffai (2016, p. 278) found that the Islamic funds market was more efficient than the conventional market during thefinancial crisis between 2007 and 2009. They used monthly data of five Islamic and five conventional stocks between January 2000 andOctober 2014. The study used correlation coefficients and Hodrick Prescott filter and computed the concordance index. The authors studied the synchronization between Islamic and conventional stock markets and found similarities between both the markets. The study also found interdepend- ence between the markets as both of them influence each other. The study recommended Islamic market as a good option for diversification of investments.

The mixed evidence calls for further examinations into the matter. In addition, market-specific charac- teristics of each sample data necessitate case-to-case analysis in order to make effective portfolio selec- tions and other investment decisions.

3. Research Methodology

An econometric methodology has been employed to study the possible lead-lag relation between Sharīʿah- compliant index and the general index of the Malay- sian stock market. Towards this, the properties of data are examined in an econometric perspective and cointegration is proposed to ascertain the nature of the relationship between the indices. In addition, to study the short-run relationship and volatility

spillover, Vector Error Correction Model (VECM) combined with EGARCH specification is applied.

The methodology adopted in this study is similar to the one used by Mallikarjunappa and Afsal (2010, p.

53). Detailed methodology is provided below.

Co-integration is applicable only with non- stationary time series data. Presence of a unit root is detected by the Dickey-Fuller test. Further, cointegration checks out the presence of a causal relationship between two sets of variables and gives the number of independent co-integrating relations. Ac- cording to Johansen (1988), two test statistics namely trace statistic, and the maximum Eigenvalue test are used to determine the cointegration rank. Johansen and Juselius (1990) provide critical values.

Considering the features of time series data such as varying variance, mean reversion, clustering, and persistence, ARCH/GARCH models are generally applied on financial time series. Various models are used for different types of analysis. With standard GARCH, asymmetric nature of the volatility parame- ter cannot be studied (Afsal & Haque, 2016, p. 1027).

Further, a response of volatility to positive and negative information is different. Hence, EGARCH model of Nelson (1991, p. 364) is more appropriate.

In order to test the causality between the Sharīʿah- compliant index and the general index of the Malay- sian stock market, the following VECM is estimated along with the EGARCH framework for each symbol.

 

 



ti s st ^s^t

r

i fi

i t r

i i s s

t

s f

s

, 1 ^,

1 ,

1 , 0

,    

 _ _

 



  

 

…... (1)

 

h N _s_t

t t

s,^|^1^~ 0, _,



 

 



t i f ft ft

r

i si

i t r

i fi

t f f s

f , 1 ,

1 ,

0

,    

  

 

   



 ... (2)

 

^h

N _f_t

t t

f_,^|₁^~ 0, _,



  ^{ }

^, ¹

1 ,

1 ln

ln _, , ^



 















 



 





 



 

 ^s ^s^t

t s t s

t s t s s t s t s s

s h

E h h h

hst        ^{….. (3)}

  ^{ }

^, ¹

1 ,

1 ln

ln _, , ^



 

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



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 

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 



 

 ^f ^f^t

t f t f

t f t f f t f t f f

f h

E h h h

hf t        ... (4)

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In equations (1) and (2), s^t and f_t represent the first log difference of Sharīʿah index and general index price; _s_,_t_₁_and^f_,t₁is the error correction term, obtained from lagged residuals of the co- integrating function of Sharīʿah index on general index price and general index on Sharīʿah index prices respectively. The strength of VECM lies in its ability to incorporate short-run dynamics with long- run equilibrium relationships among the two different set of stocks. The error correction term reflects the relationship between the index price changes.



^s,^t

and



^f^,^trepresent the error terms and 𝛼, 𝛽, 𝛿 are the coefficients.  1t represents the information set at a time𝑡 − 1. Furthermore, the causality models are greatly dependent on the lag length applied in the model (Gujarati, 2004, p. 703). The lag length is de- termined by using the Schwarz Information Criterion (SIC).

Equations (3) and (4) provide the conditional variance for Sharīʿah index and general index values respectively, and reveal the EGARCH (1,1) represen- tations of the variances of



^s,^tand



^f^,^t . The symbol  represents the standard error while ln(ℎ𝑠,𝑡) and ln(ℎ_𝑓,𝑡) measure the conditional or time-varying variances of Sharīʿah index and general index values.

𝜑 is the measure of the persistence of volatility. The conditional variances are finite if 𝜑 < 1. ARCH effects and asymmetric behavior are captured by the coefficients of s



_f __s_and



f respectively. The ARCH terms determine the spillover behavior of the markets. The lag truncation length of (1,1) for EGARCH is given by Likelihood Ratio (LR) tests.

4. Data and Properties

The present work studies the lead-lag relationship and volatility behavior of Malaysia’s Sharīʿah indices (FTSE Bursa Malaysia EMAS Sharīʿah Index, FTSE Bursa Malaysia Hijrah Sharīʿah Index, and FBMKLCI Bursa Malaysia). The dataset comprises

daily price values of these indices from January 04, 2011 to November 28, 2015, using 1209 observations.

The FTSE Bursa Malaysia Kuala Lumpur Com- posite Index (FBMKLCI) is a capitalization-weighted index of the 30 largest stocks traded on the Malaysian stock market, Bursa Malaysia. FTSE Bursa Malaysia Hijrah Sharīʿah Index (HIS) was introduced in 2007 mainly for Sharīʿah conscious investors to invest in select equities complying with the principles of Sharīʿah. The screening norms of the Sharīʿah are applied by the Malaysian Securities Commission’s Sharīʿah Advisory Council (SAC), and the conditions strictly follow Sharīʿah norms to avoid non-permitted or ḥarām sectors and meet certain limitations of financial ratios. It is constituted by 30 scripts and has a base value of 6,000. Another Sharīʿah-based index called the FTSE Bursa Malaysia EMAS Sharīʿah Index (EMAS) was launched in 2007 and has a base value of 6,000. It has broader constituents of 189 stocks.

Table 1 provides the descriptive statistics of KLCI, HIS, and EMAS for both prices and returns separately. It is evident that the average returns of both Sharīʿah-based indices (HIS and EMAS) outperformed that of the general indexKLCI during the period of study. However, the standard deviation is higher in the case of KLCI returns than the other two returns. The performance of Sharīʿah-based indices was better during the period. In all cases, the closing price series is found to be non-stationary while the return series is stationary. Table 2 provides the test results of the Dickey-Fuller test for the unit root.

As noted earlier, Johansen’s (1988) procedure is used to test co-integration. Maximal Eigenvalue and trace test statistics presented in Table 3 imply that the null hypothesis of no co-integration when r=0, is rejected at the one percent level and it is not rejected when r=1 for all three indices. It is concluded that there exists one co-integrating vector for each series.

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Table (1) Descriptive Statistics

Variable Obs Mean Std. Dev. Min Max

HSIP 1209 11885.38 1758.374 8796.62 15112.38

HSIR 1208 0.0003869 0.0057702 -0.025789 0.0310481

EMASP 1209 11042.4 1462.715 8291.46 13515.17

EMASR 1208 0.0003464 0.0058515 -0.029242 0.0324724

KLCIP 1209 1610.565 177.3722 1072.69 1892.65

KLCIR 1208 0.0002945 0.0084736 -0.155682 0.1602038

Source: Authors’ data analysis.

Table (2) Unit Root Test

Test Statistic p value

HSIP Z(t) -0.293 0.9264

EMASP Z(t) -1.074 0.7253

KLCIP Z(t) -1.602 0.4825

HSIR Z(t) -31.529 0.0000

EMASR Z(t) -30.796 0.0000

KLCIR Z(t) -44.376 0.0000

*Critical values at 1%= -3.430, 5%=-2.860 and 10%= -2.570 Source: Authors’ data analysis.

Table (3) Johansen’s Co-integration Test

S 𝑺𝒚𝒎𝒃𝒐𝒍𝒔 y



_trace(r0)



^trace⁽^r^¹⁾



^max⁽^r^⁰⁾



^max⁽^r^¹⁾

HIS(2) 87.13**

(65.21)

9.82 (6.38)

78.06**

(58.67)

5.12 (4.44)

EMAS(2) 42.62**

(20.92)

7.70 (8.21)

39.89**

(23.84)

7.16 (5.51)

KLCI(2) 96.63**

(56.24)

6.83 (4.14)

115.05**

(29.58)

8.23 (5.69) Source: Authors’ data analysis.

5. Results and Discussions

We present the results in two parts; price discovery process and volatility analysis. The first three tables provide descriptive statistics and results of preliminary tests. Tables from 4 to 7 present the

VECM-EGARCH estimates for HSI to KLCI, EMAS to KLCI, KLCI to HSI, and KLCI to EMAS, respectively.

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Table (4) VECM-EGARCH Estimates (HSI to KLCI)

HR Coef. z P>z

HR_01 -0.044 -1.560 0.119

HR_02 -0.017 -0.660 0.506

KLCIR 0.966 95.480 0.000

KLCIR_01 0.030 1.010 0.311

KLCIR_02 0.030 1.120 0.261

α,0 0.000 2.680 0.007

δ -0.013 -0.260 0.795

𝜑 -0.016 -0.340 0.736

𝛾 -0.208 -3.280 0.001

𝜃 0.862 2.940 0.003

ω -0.239 -2.160 0.031

Table (5) VECM-EGARCH Estimates (EMAS to KLCI)

ER Coef. z P>z

ER_01 -0.002 -0.060 0.949

ER_02 -0.005 -0.170 0.865

KLCIR 0.987 103.450 0.000

KLCIR_01 -0.003 -0.090 0.929

KLCIR_02 0.026 0.880 0.381

α,0 0.000 1.240 0.213

δ -0.120 -2.500 0.012

𝜑 0.104 2.200 0.027

𝛾 0.278 3.810 0.000

𝜃 1.448 6.510 0.000

ω -0.120 -1.700 0.089

Table (6) VECM-EGARCH Estimates (KLCI to HSI)

KLCIR Coef. z P>z

KLCIR_01 -0.018 -0.630 0.530

KLCIR_02 -0.027 -1.040 0.300

HR 0.852 98.350 0.000

HR_01 0.038 1.420 0.157

HR_02 0.007 0.290 0.771

α,0 0.000 -2.010 0.045

δ -0.017 -0.360 0.717

𝜑 0.008 0.170 0.867

𝛾 0.222 3.660 0.000

𝜃 1.229 5.470 0.000

ω -0.094 -2.240 0.025

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Table (7) VECM-EGARCH Estimates (KLCI to EMAS)

KLCIR Coef. z P>z

KLCIR_01 0.000 -0.010 0.990

KLCIR_02 -0.012 -0.510 0.613

ER 0.864 110.450 0.000

ER_01 0.013 0.520 0.605

ER_02 -0.014 -0.600 0.546

α,0 0.000 -0.670 0.503

δ 0.090 1.940 0.052

𝜑 -0.059 -1.300 0.195

𝛾 0.286 5.050 0.000

𝜃 0.639 3.130 0.002

ω -0.270 -2.900 0.004

5.1 Price Discovery Process

The return in the case of Hijrah Sharīʿah index (HSI) shows significant serial dependence up to the first lag and a strong correlation with general index KLCI return value. However, the lagged values do not influence significantly, except the first lag. Considering another Sharīʿah-based index EMAS Sharīʿah index (ESI), the serial dependence is not significant. How- ever, the daily returns of KLCI and ESI are strongly correlated and this relation disappears when it comes to lagged values of return. The similar behavior is reported in the case of KLCI also. The result reveals that neither general index nor Sharīʿah-based index leads or lags the other substantially, even though a short feedback mechanism exists between the two markets. There is a contemporaneous and bidirectional lead-lag relationship between indices.

Also, price discovery happens in both the indices simultaneously so that none of the indices commands a leading position. This suggests that both types of indices are identical in the information absorption.

Importantly, the coefficient of error correction is not statistically different from zero for both the HSI to KLCI and KLCI to HSI values. This implies that one market adjusts to changes to the other in the same period to maintain short-run equilibrium. This leads us to conclude that no relative advantage is attributed either to general index (KLCI) or to Sharīʿah-based index (HIS), and both achieve equilibrium instantly. The error correction term (ECT) is statistically different from zero in the case of ESI to KLCI given by a significant negative coefficient. It

indicates that if EMAS index is above its long-run relationship (equilibrium) with KLCI index, EMAS stock price will come down to reach the equilibrium level. On the other hand, KLCI to HSI shows significant positive value for ECT suggesting the relatively slow pace of KLCI index to adjust to EMAS stock price to restore equilibrium level. It is evident that the response level originates in EMAS prices to adjust with the general index KLCI.

5.2 Volatility Patterns

We study the volatility behavior of each market separately, by analyzing spillover, persistence, and asymmetric factors. The tables 4 to 7 report the pa- rameter estimates which measure the degree of volatility persistence (𝜑), volatility spillover (𝛾), and asymmetric volatility spillover (𝜃) for all the three indices under consideration. At the five percent significance level, volatility spillover from HSI stocks to KLCI stocks is significant. The spillover coefficient is negative which implies a reduction in HSI volatility and that leads to a reduction in KLCI volatility.

The spillover effects, in this case, are symmetric and the degree of volatility persistence is very low. A similar observation can be deduced with the volatility spillover from KLCI to HSI stocks.

In the case of EMAS to KLCI, there is a significant transmission of volatility patterns from one set of stocks to the other as reported by a significant coefficient of spillover effect. Interestingly, the coefficients have positive values for volatility spillover in

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both cases and this suggests that the volatility of the two indices is not certainly in the same direction.

Persistence behavior of volatility is mixed in a way that EMAS to KLCI volatility is persistent over a time, but the persistence is low in the reverse direction. The market movements are largely mixed giv- ing little way for arbitrage opportunities. The market participants interested only in either Sharīʿah-based stocks or general stocks can’t take an extra advantage. However, in the earlier case, the volatility shows symmetric patterns, but the available evidence is not strong enough to state that the market is more sensitive to negative information as widely seen. Al- most all kinds of information are identically absorbed by the market.

6. Summary and Conclusion

The objectives of finding the lead-lag relationship and volatility patterns in Sharīʿah-based indices and a general index traded on the Malaysian stock market are fulfilled in this study with the help of VECM- EGARCH framework.

We modeled the index returns from January 2012 to November 2016. It is evident that a contemporaneous and bi-directional lead-lag relationship exists among the Sharīʿah-based index and the general index. All indices almost move in tandem and price discovery occurs in both types of indices simultaneously. Information superiority cannot be attributed to any of the indices. At the same time, Sharīʿah-based indices and a general index share a long-term relationship, but it is violated in the short run.

On the other hand, any short-term disequilibrium is rectified simultaneously or in the next period.

Volatility spillover exists in all the cases but in mixed directions. Mixed evidence is reported with the persistence of volatility. In short, the volatility patterns with regard to the general index are different in both Sharīʿah-based indices. This suggests that investors in the Malaysian market have not taken Sharīʿah- based indices just on the risk or return fronts. Rather it may be because of preference for Sharīʿah- compliant norms adopted by companies in their deal- ings and operations.

The fact that there is not much difference between a Sharīʿah-based index and general index in terms of performance may further boost the preference for Sharīʿah-based stocks which are at par with general stocks. At the same time, as the present study is not based on the individual preference of stocks, the in- vestor’s specific preference for Sharīʿah-based stocks could not be established. A behavioral approach to study the investment behavior of investors would uncover the real preference levels.

Nevertheless, this study is not free from limitations. A major limitation of this study is not considering the structural changes. Also, the return which is assumed to be Gaussian distributed, can be explored further for a better mean-variance result during ex- treme events. Hence, the scope of further research would be studying for structural changes using Chow test and the application of richer models like Glosten- Jagannathan-Runkle (GJR) GARCH which can be used for further exploration.

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Mohammad Imdadul Haque is an Associate Professor at the College of Business Administration, Prince Sattam Bin Abdulaziz University. He obtained his Bachelors, Masters, and Ph.D. degrees in Economics from Aligarh Muslim University, India. His research interest is in the field of macroeconomics and market surveys. He has published over two dozen research papers in peer-reviewed and internationally reputed journals. He has been principal/co-investigator in half a dozen university-funded research projects. He has also delivered papers at several national and international conferences. Recently, he has developed an interest in the field of Islamic economics and finance.

E-mail: m.haque@psau.edu.sa

Afsal Ellath Meethal is currently a member of the faculty at the School of Management and Business Studies of Mahatma Gandhi University, Kerala, India. He has got twelve years of experience in industry, academic, and research fields in India as well as abroad. His research interests include derivatives, asset pricing and modeling, and economics and strategy. He is the recipient of awards for Best Doctoral Presentation and Best Empirical Paper. He has published in journals and presented his research papers in conferences of national and international stature. He has organized various seminars, published books, and edited a volume. He is on the editorial board of three major journals.

E-mail: afsalemfm@yahoo.co.in

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A Study on Sharīʿah Index and General Index

Volatility and Information Behavior: