Perceived
difficulties of some Biology concepts by Biology students in selected senior
secondary schools in Ikorodu Local Government Area of Lagos State
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The persistent crises in global equity markets in both developed and emerging markets
necessitated the search for alternative portfolio investment assets. Crises have been
witnessed in Asia in 1997, and the US and European stock markets have experienced
declining equity markets. This planted the seed for flourishing Islamic financial assets as
alternatives to the conventional ones. The Islamic financial assets have been floated in
global stock markets including the UK, US, Canada, Malaysia, Taiwan, Qatar, China,
Japan etc. (Yahya, Anis, Abdul, Hashim & Fakhzan, 2013). Prominent financial
institutions in the developed countries such as HSBC, Citibank, and Morgan Stanley
market Islamic assets. Similarly Islamic stocks are traded on the floors of New York
Stock Exchange and London stock exchange to provide alternatives for diversification
opportunities (Ho,Abd Rahman, Yusuf & Zamzamin, 2014).
Assets in the Islamic financial industry have been growing rapidly in the last decade.
According to Hassan, Rabbani & Ali (2020) and the Islamic finance market grew to
around US$ 2.4 trillion in 2018, an increase of 3% as compared to 2017. This was a
radical surge from US$2.2 trillion in 2015 (Shahzad, Ferrer, Ballester & Umar 2017),
US$2 trillion in 2014, 1.6 trillion in 2013, $1.46 trillion in 2012 and $1.3 trillion in 2011
respectively (Ajmi, Hammoudeh, Nguyen, and Sarafrazi, 2014; Hussain, Shahmoradi, &
Turk, 2016; Nazlioglu, Hammoudeh & Gupta, 2013). About 75% of the industry
concentrated in the Middle East. In a nutshell, the Islamic finance industry, including
Islamic capital markets, grew, on average, by 17.5% since the onset of the global
financial crisis in 2008 (Hussain, Shahmoradi, & Turk 2016).
Since many stocks performed poorly during the Global Financial Crisis (GFC) period,
many researchers have argued whether the GFC has had less impact on the Shariah
complaint stocks compared to the conventional stocks. Some researchers (Abbes, 2012)
have also argued that the difference in performance between conventional and Islamic
stocks should be minimal and some have argued that conventional stocks should
outperform the Islamic stocks McGowan and Junaina‘ study (as cited in Reddy & Fu,
2014). Arshad & Raza (2013) pointed that Islamic equity index seems to be more
volatile with a slight lag to conventional indices during times of economic downturns.
This can be related to the seminal work by Charles, Darne & Pop (2010) and Girard &
Hassan (2008) and yet is in contrast to other researchers who found that Islamic stock
indices seemed to appear less volatile during times of financial instability (Arshad &
Rizvi, 2013, and Al-Zoubi & Maghyereh, 2007). In addition, it was discovered further
that during the growth phase of a business cycle, Islamic indices appeared less volatile
and more stable. This is a reiteration of several works such as Hakim & Rashidan (2002)
and Al-Zoubi & Maghyereh, (2007).
Charles, Steak & Pop (2011) found Islamic indices to be affected in the same way as
conventional indices during the US subprime crises. In terms of risk, Al -Zoubi &
Maghyereh (2007) found that Islamic indices were less risky than conventional indices,
perhaps due to the screening of highly risky indices. Regarding the correlation between
the indices, Rizvi & Arshad (2012) found a weak correlation of movement between
conventional and Islamic, which suggests this could provide a diversification benefit to
investors in conventional indices. However, Kumar & Mukhopadhyay (2002), Wong,
Agarwal & Du (2005) observed some correlation between different markets around the
world with the possibility of the transmission of crises from one market to another.
Similarly, for Islamic indices, Majid, Meera & Omar (2007), Rahman & Sidek (2011)
and Siskawati, (as cited in Saadaoui & Boujelbene, 2015) found that volatility in all the
major global markets is unlikely to affect Islamic indices. On the other hand, several
other studies showed that there is no empirical co-integration between Islamic indices
(Karim Kassim & Arip 2010).
Since Islamic indices are guided by the principles of the Islamic law there are strong
reasons to expect them to behave differently from the conventional ones(Nazlioglu,
Hammoudeh & Gupta, 2013).For instance, the principle of asset – backed paradigm
excludes Islamic finance from excessive speculation on financial instruments such as
derivatives and futures which have no direct linkage with physical assets. it also
prohibits investing in industries that deal in alcohol, gambling, tobacco, arms etc.
(Rehman, 2009). Based on this, there should be minimal contagion and volatility
transmission or risk factor between conventional and Islamic indices because due to
their fundamental difference (Dridi & Hassan, 2010; Dewi & Ferdian, 2010; Chapra,
2008)..
In examining Islamic and conventional stock indices for their volatilities in different
countries Arshad & Raza (2013:8) revealed that throughout the twelve-year period,
Islamic indices seemed to follow a similar pattern to that of its conventional counterpart.
This indicates that the impact of business cycle movements affect the two indices in a
similar manner. This allows policymakers the opportunity of clustering both stocks
under the same umbrella when considering policies that may affect the financial
markets. They also pointed that Islamic equity index seems to be more volatile with a
slight lag to conventional indices during times of economic downturns.
Arshad and Raza (2013) discovered conventional indices perform better than Islamic
ones. Quite a number of studies reported Islamic indices perform better than
conventional indices (Ho et al, 2013; Shubbar, 2010 and Reddy and Fu, 2014). There
were others that found no difference between both indices (Ajmi et al 2014, EL-Mosaid
& Boutti, 2014, Miniaoui, Sayani & Chaibi, 2015).Hussein (2004) reported that Islamic
index yields positive abnormal returns in bullish period and underperforms its
conventional counterparts in bearish period. Ridwan (2009) came up with an
inconclusive result as to which is riskier between Islamic and conventional indices.
Following the work of Ho et al (2013), Merdad (2012) and Albaity and Ahmad (2011)
this study examined the risk and risk–adjusted return performances, volatility, and
leverage effect, and the effect of US macroeconomic factors on 22 selected conventional
and Islamic indices in 11 countries comprising US, EU, Canada, Japan, Taiwan, China,
Qatar, India, Kuwait, Malaysia and Turkey. To ensure valid comparisons, the selected
Islamic indices were matched with their conventional indices.
1.2 Statement of the Problem
The stock market crash during the subprime global crises of 2008 demonstrated the
financial contagion of shocks and interconnectivity of world stock markets. Although
the subprime crises emanated from real estate markets in the United States, it
sporadically spread all over the world affecting both developed and developing nations
including emerging stock markets like Turkey, India, Malaysia, Qatar, Kuwait, China,
etc. (Saadaoui & Boujelbene, 2015). As the global crises escalated and took a global
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dimension, it devastated the real economy with a general downturn, the value of assets
crashed in the global stock markets, inflicting substantial losses to investors running in
to billions of dollars (Hussain, Shahmoradi & Turk, 2016). Given its financial strength
and influence, volatility shocks from the US were easily transmitted to the rest part of
the world as observed during the subprime crises. Ahlgren & Antell (2010) observed
that one of the main features of globalization and swift transmission of information
across markets is the extension of financial crises from one country to the other even if
the macroeconomic fundamentals are different. Indeed, investors need a guide line to
effective and less risky investment that can withstand market shocks.
Two decades ago investors in stock markets had limited choices as only conventional
stocks were available but as time went by Islamic stocks were ushered in the market as
alternative investments. The Dow Jones and FTSE were the first major conventional
indices that created Islamic indices as alternative investment opportunities to investors.
This ushered Islamic indices such as Dow Jones Islamic Market Index (DJMI) in
1999 and FTSE in 1998 as global Islamic Index Series that only incorporates stocks
that comply with Islamic principles. Theoretically, Islamic stock indices were better
positioned to be more resilient to shocks due to specific features such as ethical and ratio
screenings, the exclusion of the financial sector and of highly-leveraged firms, the limit
on interest-based leverage, and, finally, the exclusion of investing in complex
excessively risky subprime and toxic assets, as well as zero-sum betting on derivatives
(Ata & Bugan, 2015 and Saiti, Bacha & Masih, 2016). By promoting risk sharing (as
opposed to risk transfer) and endorsing investment in wealth creating activities, the
asset-based nature of Islamic financing naturally curbs excessive leverage. It also
restricts Islamic banks from investing in highly leveraged assets and short selling,
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suggesting that they are likely to foster financial stability and render the global financial
system less prone to financial distress. The direct link between the financial and the real
or trade sectors may also prevent technical speculations and potential bubbles (Hussain,
Shahmoradi & Turk, 2016).
However, the literature is loaded with contradictory opinions on the hypothesized
resilience of the Islamic indices. On one hand, some argued that Islamic indices offered
relatively more stability as they were less volatile and were able to adapt
themselves with the market fluctuations and changes. Further, the screening and
filtering process of Islamic indices, risk-sharing and asset-based financing, should
presumably make them more resilient than the conventional ones during financial crisis
(Arshad & Rizvi, 2013 and Pranata, 2015). While on the other hand, some scholars cast
doubt on the ability of Islamic indices to perform as well as the conventional ones due to
the smaller size of the investment pools relative to the conventional asset markets. In
addition, giving its lower diversification potential as well as the higher costs of Islamic
compliant portfolio selection, one may suggest that these investments would
underperform the conventional ones (Bauer et al., 2005).
Even though the focus of this study is not the global financial crises or its effect on both
indices, but its occurrence and aftermath intensified the debate on which of the indices
outperforms the other in terms of risk, volatility and response to macroeconomic shocks
from the US. A preview of information and data available on the official website of the
Wall street journal indicated that both conventional and Islamic indices were affected
terribly by the crises. For instance, the data revealed that the major stock market crash of
2008 occurred on 29th September, 2008 corresponding to when the Lehman Brothers
declared bankruptcy. The Dow Jones Industrial Average index (DJIA) fell 777.68 points
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in intraday trading which was its largest point drop in history, closing around 10, 000
points for the first time since 2004. By the end of December 2008, Dow further crashed
to 8, 776.39 down almost 34% for the year. On March 5th 2009, Dow dropped by more
than 50% to its bottom of 6,594.44 point. (The Balance.com and www.wsj.com).
Similarly Dow‘s Islamic counterpart, Dow Jones Islamic Market Index (DJIMI) was
increasing since 2004 until it suddenly declined in a dramatic way in 2008 due to the
financial crisis. Though it began to rise again by the beginning of 2009, however the
level of recovery was low in comparison with the index level just before the crisis
began. Since both indices declined drastically during the crises, it could suggest a strong
correlation between them and the US macroeconomic fundamentals.
The behaviour of FTSE 250 GBP during the subprime crises wasn‘t much different from
that of the Dow Jones. It lost about 24% of its value for the year on 29th September 2008
by dropping to 10, 365.45 points as against 12, 800 points on January 1st, 2008. This
suggests the possibility of contagion between the US based Dow Jones and the British
FTSE index. The Shariah compliant product of the FTSE, FTSE Shariah All-World
index, fluctuated in the first 6 months until it reached its peak in the mid of May 2008.
Then, it suddenly declined sharply till the end of Febreuary 2009 due to the 2008
subprime crisis and its impacts. However, the index rose steadily at the beginning of
March 2009, but the recovery rate was slow relative to the pre-crisis period. This also
suggests some level of correlation between the conventional indices and its Islamic
counterpart, since they both responded to the shock in a similar manner.
The problematic here is, once there is evidence of correlation between conventional and
Islamic indices then it undermines the benefit of diversification as postulated by the
Markowitz theory. Meaning that, there is no incentive for investors to combine both
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conventional and Islamic indices in the same portfolio as it would not guarantee hedging
against risk or higher returns. Secondly, the information from the wall street journal,
suggests that both conventional and Islamic indices were affected by the subprime crises
in the US and with the possibility of contagion from the US to other countries as
observed in the FTSE. Therefore, the ongoing debate as to which of the indices amongst
the two is more resilient to volatility shocks can only be settled through more empirical
works of this manner. Thirdly, since the focus of this study is on Dow Jones and FTSE
which were the first major global indices to float Islamic counterparts and have wider
global presence in many countries, it‘s important to investigate how the US
macroeconomic variables affect their volatilities because their basis point is measured in
US dollars. There could be the possibility of linkage between US macroeconomic
factors and the price fluctuations of these indices. Fourthly, since it appears from the
available information, that the recovery rate of both indices after the crises was slow, it
gives reasons to investigate leverage effect. The presence of leverage effect will
suggests that bad news has greater influence on the price of the stocks than good news.
When a substantial decline in an equity price is not matched by a decline in the value of
debt, the firm‘s debt to equity ratio will increase alongside with the financial risk of the
firm‘s investors.
Markowitz theory suggests that the benefit of diversification of portfolio improves
hedging against risk. The debate over whether Islamic and conventional indices are
substitutes or complementary in terms of portfolio diversification benefits is ongoing.
That is, whether Islamic indices represent an alternative class of investment with
distinctive characteristics that allow investors to obtain effective diversification benefits
and downside risk reductions. Giving fresh perspective to this debate is the central thesis
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in this study. The motivation of this study is to report findings from a comparative study
of both types of investments since this issue has yet been bedded down.
Thus, the following research questions were designed to guide this study:
i. What is the nature of the long-run relationship between conventional and
Islamic indices, and the US macroeconomic variables?
ii. Is there leverage effect (asymmetry), volatility reaction to the market and
volatility persistence amongst conventional and Islamic indices?
iii. What is the effect of US macroeconomic variables on the volatility of
conventional and Islamic indices?
iv. What are the risk-adjusted return performances of conventional and Islamic
indices?
1.3 Objectives of the Study
The broad objective of this study is to examine the portfolio performance of
conventional and Islamic indices. However, other specific objectives include the
following:
i. To determine the long-run relationship between conventional and Islamic
indices, and the US macroeconomic variables
ii. To analyze the leverage effect (asymmetry), volatility reaction to the market
and volatility persistence of conventional and Islamic indices
iii. To determine the effect of US macroeconomic variables on the volatility of
the conventional and Islamic indices.
iv. To examine the risk and risk-adjusted return performance of conventional
and Islamic indices.
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1.4 Research Hypothesis
The study tested the following hypotheses:
H01: There is no long-run relationship between conventional and Islamic indices, and
the US macroeconomic variables
H02: There is no leverage effect, volatility reaction, volatility persistence of conventional
and Islamic indices
H03: There is no significant effect of US macroeconomic variables on the volatility of
the conventional and Islamic indices.
H04: There is no significant difference in the risk and risk-adjusted return performances
of conventional and Islamic indices.
1.5 Justification of the Study
The motivation of this study arises from the growing interest in Islamic finance and the
increasing innovation and introduction of Islamic financial assets in the global stock
markets. Investors and policymakers would be interested in factual information to serve
as their guide in investment decisions and portfolio management. This is especially
important given the uncertainty of the financial market with looming crises surfacing not
only in emerging but also in developed markets. The study developed a conceptual
framework that could be used to analyze portfolio investment choices containing
conventional and Islamic stock given the nature of their stochastic properties, volatilities
and effects of macroeconomic variables.
The selection of the macroeconomic variables for inclusion in the analysis was governed
by the time series that are commonly included in studies of stock return predictability. It
is assumed that stock market behavior is related to macroeconomic conditions as
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postulated by the Arbitrage Pricing Theory (APT). It will be quite tedious to consider all
possible macroeconomic variables, therefore, this study is limited to the following US
factors: Brent oil price as a measure of oil market influence on stock prices, US
Economic Uncertainty Index (EUI) to measure US policy response to economic and
political news (Nazlioghu, Hammoudeh and Gupta, 2013), Federal Funds Rate (FFR) as
proxy for monetary policy influence on stock markets and, volatility and fear index
(VLF) to capture anxiety on US stock market. These four variables were all used in
Nazlioghu, Hammoudeh and Gupta (2013:7). To build on their work, this study
reasoned with Ejaz and Akhtar (2015) and included US three months Treasury bill to
measure short-term interest rate. In addition, as in Khositkulporn (2013), Abugri
(2002), Caner and Onder (2005), and Granger, Huang and Yang (2000) the study added
US inflation rate, and money supply.
From the reviews done so far by the researcher, it seems only limited researches have
been undertaken that examined the volatilities of conventional indices with Islamic
indices using global cross-country data. Most of the studies encountered in the literature
that studied the nexus between Islamic and conventional indices used performances
measures of Sharpe ratio, Treynor index and Jensen alpha as their methodologies of
comparison (e.g. Ho et al 2013, Shubbar 2010, Ajmi et al 2014, Hussein 2004, Hussein
2005, Hoepner et al 2011, and Hassan and Girard 2011). The methods employed in
these studies were only ratios that give idea on the risk – adjusted returns of the two
indices. It does not give a detail account of the effect of volatilities typically associated
with the stylized facts of financial data.
However, a number of studies improved on this by employing GARCH models to study
the volatilities of conventional and Islamic indices and the relationships therein, for
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instance Arshad and Raza 2013, Miniaoui, sayani and Chabi 2015, Albaity and Ahmad
2011, Al-Zoubi and Maghyereh 2007 and Reddy and Fu 2014. Even though these
studies employed the GARCH models including GARCH-M, EGARCH and the
TARCH models which are considered sufficient in capturing volatility, and leverage
effect of stock market indices none of these studies used the cross-country data and the
period covered in this study. Again none of these studies used the conceptual framework
developed in this study that related the combine effects of volatility, macroeconomic
variables, and leverage effect on the stock returns volatility of conventional and Islamic
indices using cross country data.
Drawing from the literature reviewed, undoubtedly there is a growing focus on the
linkages between Islamic and conventional finance markets but the empirical
conclusions seems to be inconclusive. These mixed results could be attributed to time
periods, data sets, frequencies, methodologies and model descriptions. Thus, this study
attempted to fill the literature gap in that respect.
Notably, the study extended the findings of Caner and Onder (2005) on factors affecting
volatility in stock market, the works of Koutmos (1996), Koutmos and Booth (1995),
and Booth, Martikainen and Tse (1997) on leverage effects, and the work of
Khositkulporn (2013) on the factors affecting stock market volatility , the findings of
Papapetron (2001), Sadorsky (2001), Chen (2009), Brouwer (2003), Wang and Lin
(2009), Diebold and Yilmaz (2008) and Longstaff (2010), Basher and Sadorsky (2006)
and Nandha and Faff (2008) on oil price fluctuation and the equity market.
The study has potential to benefit regulators, fund managers, investment analysts, and
general investors in terms of gaining better understanding of the effect of volatility on
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the risk and returns of conventional and Islamic stock indices, as well as the factors
determining their volatilities. The findings from this study will provide investors some
valuable guidelines regarding optimal portfolio investment choices between
conventional and Islamic stocks. It‘s also hoped that this study will serve as a
springboard for more researches in the area of portfolio management.
1.6 Scope and limitations of the Study
The study examined the effects of volatility, leverage effects, and macroeconomic
variables on the risk and returns of conventional and Islamic indices for the period 2006
to 2017. Data was obtained from 11 countries for both Islamic and conventional indices.
It was discovered that most countries do not have Islamic indices or do not have data on
it before 2006; therefore, the study was constrained to begin its analysis from 2006 that
was two years before the US mortgage financial crises. Emphasis was given to the Dow
Jones index for two reasons. First it has the widest global coverage across countries and
secondly, it‘s the index that has the Islamic counterpart in most countries. Dow Jones
launched its first Islamic market index in 1999 which includes stocks from 34 countries
and covers 10 economic sectors, 18 market sectors, 51 industry groups and 89
subgroups defined by the Dow Jones Global Classification Standard. It‘s only when data
on Dow Jones was not available that a substitute preferably FTSE was used. FTSE is
another index that also has a global representation in 29 countries and has 15 Islamic
indices. It was in 1998 that the FTSE, launched FTSE Global Islamic Index Series
(GIIS) which is a subset of the FTSE All-World Index group.
In this regard search through the data base of the Wall Street Journal for countries that
have a pair of conventional and Islamic indices led to the selection of the following
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countries as the sample: United States, European Union, France, Japan, Canada, Turkey,
Kuwait, India, Qatar, Taiwan and Malaysia. All these countries have robust economies
and flourishing stock markets; therefore they provide strong bases for making empirical
comparison of the performances of conventional and Islamic indices that covers the
period 2006 – 2017.
1.7 Organization of Chapters
The work is organized into five chapters; chapter one contains the general introduction
comprising the statement of problem, the research objectives, the hypotheses and the
scope and limitations of the study. Chapter two gives the conceptual literature
explaining the key concepts related to the study; the theoretical literature reviewed four
theories relevant to the study comprising modern portfolio theory (MPT), capital asset
pricing model (CAPT), arbitrage pricing model (APT) and market efficiency theory
(MET); the empirical literature was grouped into studies diversification, studies on riskreturn
of conventional and Islamic indices, studies on risk-return of conventional and
Islamic indices, studies on volatility of conventional and Islamic indices, and studies on
macroeconomic variables. This chapter also contains the theoretical framework. Chapter
three outlined the conceptual framework, data sources, variables measurement and
models specification. Chapter four presents results and discussions and finally, chapter
five contains the summary, conclusion and recommendations.
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