International and Domestic Integration Among Islamic Investment: Is There Any Co-Movement?

Abstract

This paper aims to examine the benefits that Islamic investors can gain through international diversification as they are restricted to investing in sharia-compliant funds only compare to conventional investors who have no restrictions. The study investigates the co-movement of Pakistan’s Islamic funds with the regional Islamic funds of Asia Pacific, North America, Europe, MENA and aggregate of all global Islamic funds. Additionally, the study determines the cointegration of Pakistan’s Islamic funds with the Pakistan conventional and Islamic stock market. The study applied unit root, cointegration and Granger causality test on monthly index prices from the period of Jan 2009 to Dec 2018. The analysis revealed that there is no co-movement of Pakistan’s Islamic funds with the Islamic fund’s markets of North America, Europe, and MENA regions. Therefore, investors of these regions can reduce risk through investment in Pakistan’s Islamic funds and local investors can benefit from investing in these countries. Whereas Islamic fund of Pakistan have co-movement with the Islamic funds of Asia Pacific region so, investors cannot minimize risk through maintaining international portfolio in these countries. Furthermore, it is found that there is a co-movement of Pakistan Islamic funds with Pakistan’s stock market, both conventional and Islamic. The findings are helpful for fund managers and investors as they can maximize returns by diversifying investment in these markets and secondly the research qualify Pakistani market as an attractive diversification tool for international portfolio managers, and thirdly low integration among Islamic funds justify the promotion of Islamic investment in Pakistan.

Keywords: International diversification, Co-movement, Islamic Investments Funds, Cointegration analysis, Stock Market