Financial Integration among Shariah-compliant Indices: Empirical Evidence from Global Stock Markets

Abstract

Due to the interdependence of the markets, investors have several options for arbitraging and diversifying their portfolios. New and creative securities have been added to the international stock exchanges. Global investors have quickly become interested in Shariah-compliant security indexes. This study will look at these relationships to better understand the long- and short-term dynamics of financial integration among Shariah-compliant indices and the causal effect among these markets. Daily data for Karachi Meezan Islamic Index (KMI-30), Dow Jones Islamic Index (DJII), Standard and Poor 500 Index (S&P-500), Jakarta Islamic Index (JII), and MSCI Islamic Index have been take from 2018–2022. The data was stationary at integrated order I(1) by using the ADF test. Co-integration and VECM tests have been used to identify long-run and short-run linkages and identified that there exists evidence for short-and long-term relationships among these indices. Using the Granger Causality Test, the connection among these markets determines unidirectional and bidirectional lead and lag linkages. Finally, it is concluded that foreign investors can benefit from passive portfolio diversification opportunities and achieve abnormal profits through arbitrage.

Key Words:  Shariah compliance, arbitrage, Co-integration, VECM, Portfolio Diversification