Pareto lévy in Islamic stock markets: a research agenda for Islamic finance

  • Authors

    • Felicia Chong Hui Ling RESEARCH sCHOLAR
    • Rusnah Muhamad PROFESSOR
    2019-09-04
    https://doi.org/10.14419/ijet.v8i3.15059
  • Islamic Finance, Pareto Lévy, Portfolio, Risk, Statistical Physics.
  • This research note suggests an alternative approach to study the characteristics of Islamic financial markets in ways allowing one to observe the actual characteristics of the market and to model its characteristics analytically while avoiding incorrect postulations especially during high market volatility. It unfolds the non-Gaussian truth when managing Islamic portfolios to pave ways for prudent portfolio approaches. We present this approach using mathematical illustrations and specific structures in physics to reinforce new orientation and strategy in Islamic equities management. Our observation suggests that future investigations should consider anomalous volatilities in modeling the financial markets for enhanced portfolio management.

     

     

  • References

    1. [1] Ausloos, M. (2014), Toward fits to scaling-like data, but with inflection points & generalized Lavalette function, Journal of Applied Quantitative Methods, 9, 2014) 1-21

      [2] Bachelier, L. (1900). Théorie de la spéculation. Gauthier-Villars. https://doi.org/10.24033/asens.476.

      [3] Bradley, B. O., & Taqqu, M. S. (2003). Financial risk and heavy tails. Handbook of Heavy-Tailed Distributions in Finance, ST Rachev, ed. Elsevier, Amsterdam, 35-103. https://doi.org/10.1016/B978-044450896-6.50004-2.

      [4] De Vries, C. G. (2005). The simple economics of bank fragility. Journal of banking & finance, 29(4), 803-825. https://doi.org/10.1016/j.jbankfin.2004.08.003.

      [5] Dimakos, X. K., & Aas, K. (2004). Integrated risk modelling. Statistical modelling, 4(4), 265-277. https://doi.org/10.1191/1471082X04st079oa.

      [6] Engle, R. F. (1982). Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica: Journal of the Econometric Society, 987-1007. https://doi.org/10.2307/1912773.

      [7] Fama, E. F. (1963). Mandelbrot and the stable Paretian hypothesis. The journal of business, 36(4), 420-429. https://doi.org/10.1086/294633.

      [8] Fama, E. F., & Miller, M. H. (1972). The theory of finance. Holt Rinehart & Winston.

      [9] Harrison, J. M., & Kreps, D. M. (1979). Martingales and arbitrage in multiperiod securities markets. Journal of Economic theory, 20(3), 381-408. https://doi.org/10.1016/0022-0531(79)90043-7.

      [10] Harrison, J. M., & Pliska, S. R. (1981). Martingales and stochastic integrals in the theory of continuous trading. Stochastic processes and their applications, 11(3), 215-260. https://doi.org/10.1016/0304-4149(81)90026-0.

      [11] Hasbrouck, J. (2007). Empirical market microstructure (Vol. 250). New York: Oxford University Press.

      [12] Hassan, K., & Mahlknecht, M. (2011). Islamic capital markets: products and strategies (Vol. 609). John Wiley & Sons. https://doi.org/10.1002/9781119206040.

      [13] Jovanovic, F. (2008). The construction of the canonical history of financial economics. History of Political Economy, 40(2), 213. https://doi.org/10.1215/00182702-2008-001.

      [14] Jovanovic, F. (2010). Efficient markets theory: Historical perspectives. Encyclopedia of quantitative finance. https://doi.org/10.1002/9780470061602.eqf01031.

      [15] Jovanovic, F., & Schinckus, C. (2013). Econophysics: a new challenge for financial economics? Journal of the History of Economic Thought, 35(03), 319-352. https://doi.org/10.1017/S1053837213000205.

      [16] Jovanovic, F., & Schinckus, C. (2017). Econophysics and Financial Economics: An Emerging Dialogue. OUP Catalogue. https://doi.org/10.1093/acprof:oso/9780190205034.001.0001.

      [17] Levy, H., Levy, M., & Solomon, S. (2000). Microscopic simulation of financial markets: from investor behavior to market phenomena. Academic Press. https://doi.org/10.1016/B978-012445890-1.50006-6.

      [18] Mandelbrot, B. (1963). New methods in statistical economics. Journal of political economy, 71(5), 421-440. https://doi.org/10.1086/258792.

      [19] Mantegna, R. N., & Stanley, H. E. (2007). Introduction to Econophysics. Introduction to Econophysics, by Rosario N. Mantegna, H. Eugene Stanley, Cambridge, UK: Cambridge University Press, 2007.

      [20] Markowitz, H. (1952). Portfolio selection. The journal of finance, 7(1), 77-91. https://doi.org/10.1111/j.1540-6261.1952.tb01525.x.

      [21] Resnick, S. I. (2007). Heavy-tail phenomena: probabilistic and statistical modeling. Springer Science & Business Media.

      [22] Rosenberg, J. V., & Schuermann, T. (2006). A general approach to integrated risk management with skewed, fat-tailed risks. Journal of Financial economics, 79(3), 569-614. https://doi.org/10.1016/j.jfineco.2005.03.001.

      [23] Roy, A.D. (1952). Safety First and Holding the Assets. Econometrica 20(3), 431-449. https://doi.org/10.2307/1907413.

      [24] Scherer, B., & Martin, R. D. (2005). Modern Portfolio Optimization with NuOPT™, S-PLUS®, and S+ Bayes™. Springer Science & Business Media. https://doi.org/10.1007/978-0-387-27586-4.

      [25] Schinckus, C. (2009). La finance comportementale ou le développement d'un nouveau paradigme. Revue d'Histoire des Sciences Humaines, (1), 101-127. https://doi.org/10.3917/rhsh.020.0101.

      [26] Schinckus, C. (2013), “How do Econophysicists make stable Levy Processes physically plausibleâ€, Brazilian Journal of Physics, vol 43(4), 281-293. https://doi.org/10.1007/s13538-013-0142-1.

      [27] Schinckus, C. (2016), “1996-2016: Two decades of econophysics: Between methodological diversification and conceptual coherence†(on invitation), Special Topics issue 'Discussion & Debate: Can economics be a physical science? The European Physical Journal (Q2), Vol. 225, p 3299–3311. https://doi.org/10.1140/epjst/e2016-60099-y.

      [28] Smolo, E., & Mirakhor, A. (2010). The global financial crisis and its implications for the Islamic financial industry. International Journal of Islamic and Middle Eastern Finance and Management, 3(4), 372-385. https://doi.org/10.1108/17538391011093306.

      [29] Von Plato, J. (1994). Creating modern probability: Its mathematics, physics and philosophy in historical perspective. Cambridge University Press. https://doi.org/10.1017/CBO9780511609107.

  • Downloads

  • How to Cite

    Chong Hui Ling, F., & Muhamad, R. (2019). Pareto lévy in Islamic stock markets: a research agenda for Islamic finance. International Journal of Engineering & Technology, 8(3), 279-283. https://doi.org/10.14419/ijet.v8i3.15059