Impact of global financial crisis on Islamic and conventional stocks in emerging market: an application of ARCH and GARCH method DR.Raditya Sukmana (Lecturer in Dept of Islamic Economic, Airlangga University, Surabaya,Indonesia) Email: firstname.lastname@example.org & Muhamad Kholid, MBA, CIFP (Islamic Finance Practitioner & Student in INCIEF, Kuala Lumpur, Malaysia) Email: email@example.com
Abstracts In the wake of recent global crisis, the stock market shocks spread and transmitted from its epicenter in the developed stock market to emerging stock markets. The financial contagion affects performance of emerging stock markets like those of in Indonesia, Malaysia and in most Southeast Asia countries. In supporting development of emerging stock markets, this study aims to see the resilient of the Islamic stock index compare to conventional stock index in facing the global financial crisis. Another purpose of this study is to provide a new guide for the investors in emerging stock market before making investment decisions. This study examines the risk performance of Islamic stock index (Jakarta Islamic Index/JAKISL) and its conventional counterpart (Jakarta Composite Index/JCI) in Indonesia. Daily data from early January 2001 to December 2009 will be adopted. In order to measure the involved risk, we employ the ARCH and GARCH methodologies. The result shows that investing in Islamic stock index is less risky than that of the conventional Introduction Stock market crash around the world during the crisis period demonstrated the financial contagion of recent global financial crisis. Notwithstanding the financial crisis firstly hit stock markets in the United States and other developed market, it soon spread around the world to hit stock markets in emerging country like Indonesia and other Southeast Asia countries. This is well explained as one of the salient features of globalisations and the rapid transmission of information across market is the spread of financial crisis from one country to another, even when underlying economic fundamentals are different (Ahlgren & Antell, 2009). Hence, high economic linked between emerging market and developed market just becomes the conductor of the contagion. With such markets environment, investors need a guide to make effective investment portfolio, an investment that can stand market shocks and least risky. Risk is important in investment since risk is a factor that shapes individuals’ decision to make investment (Lipe, 1998; Yang and Qiu, 2005). Knowing the investment risk, it will guides investor in developing effective investment portfolio especially during the crisis period. In view of rapid development of Islamic finance, and thus Islamic investment, this paper tries to measure and compare the resilience of Islamic stock index and conventional stock index during the financial crisis. This study will further be used as new guide for investors in emerging stock markets to create effective investment portfolio. The study examines the risk performance of stock markets in Indonesia. The stock market has two indices namely, Jakarta Islamic Index (JAKISL) and its 1 1.
conventional counterpart, Jakarta Composite Index (JCI). JAKISL is a subset of JCI where all stocks of JAKISL are part of JCI. JAKISL consists of sharia compliant stocks that have gone through sharia screening process. The screening process measures sharia compliant of stock using three approach/method of valuation namely, production or activity method, income method and capital structure method (Rosly, 2005). The components of the JAKISL are 30 listed companies, approved by the Sharia Supervisory Board of Danareksa Investment Management to be in line with Sharia rules. The index is calculated with a base value of 100, with January 1, 1995 as the base year. The trading of the index was started on July 3, 2000 (Rahim, Ahmad N & Ahmad I, 2009). Risk performance of JAKISL and JCI is measured using ARCH and GARCH methodologies....
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