The Integration Between Islamic and Sectorial Indices: Evidence From China Based on Multivariate-Garch

Abstract

Purpose – The purpose of this paper is to investigate the extent to which Chinese equity investors can benefit from diversifying their portfolio into Shariah-compliant (Islamic) indices. It examines three Islamic stock indices (FTSE Shariah China price index, MSCI China Islamic IMI price index and the DJ Islamic Greater China price index) and ten sectorial indices in Shanghai Stock Exchange including sectors of energy, materials, industrials consumer discretionary, consumer staples, health care, financials, information technology, telecommunication and utilities as a sample. Design/methodology/approach – The multivariate GARCH-dynamic conditional correlation is deployed to estimate the time-varying linkages of returns of the selected indices, covering approximately eight years daily data starting from 28 August 2009 to 29 September 2017. Findings – In general, in terms of volatility, the results indicate that all Islamic Indices are less volatile than the conventional indices. From the correlation analysis, the results tend to illustrate that Chinese conventional equity investors would benefit from Islamic stock indices, especially when they include DJ Islamic Greater China in their portfolio. Besides, conventional investors who invest predominantly in the conventional sectors of health care, consumer staples and information technology are set to benefit most from diversifying their portfolios in Islamic stock indices because of the weak correlations of returns. Originality/value – The findings of this paper may have several significant implications for the Chinese equity investors and fund managers to have a better understanding about return correlations between the Chinese conventional sectorial indices and the Shariah-compliant stock indices with the purpose of gaining higher risk-adjusted returns through portfolio diversification. With regard to policy implications, the findings provide useful insights for Chinese policymakers into formulating new economic stabilization policies to further promote the development of Shariahcompliant capital market in China, and then promote the development of Chinese economy.