An Empirical Examination of the Dynamic Linkages of
Faith-Based Socially Responsible Investing

Abstract

A fundamental tenet of the investment management process is portfolio construction to maximize wealth creation through investment in efficient portfolios. Faith-based, socially responsible investments (SRI), on the other hand, place importance on investors’ concern with the religious and faith-based consequences of investment decisions. This study examines dynamic linkages among four major Islamic indexes and their corresponding “conventional” indexes of North America, European Union, Far East, and Pacific nation markets. Contrary to the widely held assumption that faith-based SRI involve a selective portfolio selection process due to faith-based screening, and are likely to have low correlation with the set of counterpart conventional investments, we find evidence of a positive and significant spillover from conventional market indexes on their corresponding faith-based SRI returns. Results from impulse response analysis show that innovations in conventional indexes have significant and positive impact on their corresponding Islamic indexes. Regarding the nature of volatility spillover, we find evidence of a positive and significant spillover from conventional indexes on their corresponding Islamic indexes. We also find evidence of an asymmetric news effects.

TOPICS: ESG investing, global, portfolio construction, performance measurement