Risk, Business Cycles and Financial Crises: Evidence from Islamic and Conventional Stocks

Lain-Tze Tee, Si-Roei Kew

Abstract


ABSTRACT

This study examines whether business cycles and financial crises affect the risk of Islamic stocks compared to conventional stocks in Malaysia for the period 1997 to 2016. The findings conclude that business cycles play a crucial role in affecting stock risk. Specifically, stock risk tends to be higher during the economic contraction than during economic expansion for Islamic, conventional and all stocks. We further test whether Asian and Global financial crises exacerbate stock risk. The results document that the level of stock risk increases during financial crises. Moreover, we find that the impact of economic contraction and financial crises on increasing stock risk remain significant after controlling for various variables known to have effect on risks. In addition, we discover that the risk of Islamic stock is lower compared to those of conventional and all stocks during the economic contraction and financial crises. This recommends the diversification advantage and investment opportunity of the Islamic stocks during the periods of financial turbulence. The findings offer important insights to investors who are considering Islamic or conventional stocks as potential investment and to policymakers in evaluating stock risk in different economic states.

Keywords: Islamic and conventional stocks; stock risk; business cycles; economic expansion and contraction; financial crises

ABSTRAK

Kajian ini dijalankan untuk mengkaji sama ada kitaran perniagaan dan krisis kewangan memberi kesan kepada risiko saham Islam berbanding saham konvensional di Malaysia dari tahun 1997 ke 2016. Penemuan menyimpulkan bahawa kitaran perniagaan memainkan peranan penting dalam mempengaruhi risiko. Khususnya, risiko adalah lebih tinggi semasa pengecutan ekonomi berbanding pengembangan ekonomi bagi semua saham, saham Islam dan saham konvensional. Selain itu, kami mengkaji sama ada krisis kewangan Asian dan global memberi kesan terhadap risiko saham. Kami mendapati bahawa tahap risiko meningkat semasa krisis kewangan. Kami juga mendapati risiko saham kekal meningkat semasa pengecutan ekonomi dan krisis kewangan selepas merangkumi pembolehubah kawalan yang mempunyai kesan terhadap risiko saham. Kami mendapati bahawa saham Islam adalah kurang berisiko berbanding saham konvensional dan semua saham semasa pengecutan ekonomi dan krisis kewangan. Ini mencadangkan bahawa saham Islam memberikan kebaikan diversifikasi dan peluang pelaburan dalam tempoh pergolakan kewangan. Penemuan ini memberi implikasi penting kepada pelabur yang sedang mempertimbangkan saham Islam atau konvensional sebagai pelaburan yang berpotensi dan kepada pelaksana dasar untuk menilai risiko saham dalam keadaan ekonomi yang berbeza.

Kata kunci: Saham Islam dan konvensional; risiko saham; kitaran perniagaan; pengembangan dan pengecutan ekonomi; krisis kewangan


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