key: cord-1011905-seq49z9o
authors: Dharani, Munusamy; Hassan, M. Kabir; Rabbani, Mustafa Raza; Huq, Tahsin
title: Does the Covid-19 Pandemic Affect Faith-based Investments? Evidence from Global Sectoral Indices
date: 2021-09-09
journal: Res Int Bus Finance
DOI: 10.1016/j.ribaf.2021.101537
sha: 1f1f1432cbc6e8ab79a5f7672316beb5abc6f006
doc_id: 1011905
cord_uid: seq49z9o

In this paper, we aim to investigate the influence of the Covid-19 on the behavior of the S&P 1200 Shariah and non-Shariah sectoral indices over the period from 1(st) October 2010 to 29(th) October 2020. We contribute to the global literature by examining the financial impact of the Covid-19 on the Shariah and non-Shariah sectoral indices. We find that the S&P 1200 Shariah Communication, consumer staples, financials, healthcare, industrials, IT, materials, and utility sectors earn higher average returns than their counterpart sectoral indices during the Covid-19 period. The study reports that on average, the volatility of the Shariah indices is less than their counterpart indices. Moreover, we further document that on average the S&P Shariah sectoral indices offer a higher return with low risk even during the Covid-19 global pandemic. We suggest that ethical investments are the best alternatives to retail, institutional, and foreign investors.

Japanese stock market dropped more than 20% (Zhang et al. 2020 ). On the same date, the Indian stock market index, the Sensex, fell by more than 2919 points.

However, some sectors like the software, healthcare, food, and natural gas sectors have performed well and earned positive returns during the pandemic period (Mazur et al. 2020) .

Moreover, the environmental, social, governance and notably ethical firms (ESG stocks) recorded higher stock returns during the pandemic period (Singh, 2020) . For instance, Sherif (2020) reports that the Covid-19 insignificantly interacts with the Dow Jones Islamic index for the study period. Moreover, the government also has taken multiple policies such as stimulus packages, travel bans, and lockdowns to regulate and stabilize the crisis. As a result, the stock markets reacted positively to the government stimulus schemes in the G7 countries (Narayan et al. 2020) . Nonetheless, many stocks are affected by the panic selling pressure of investors with fear during the Covid-19. For instance, petroleum, real estate, entertainment, and hospitality sectors have fallen and earned negative returns in the same period (Mazur et al. 2020) . However, previous studies examined the impact of the Covid-19 on the risk and return at the stocks and indices levels. Many studies focused on the common sectoral stocks to examine the impact of the Covid-19 on the stock returns. Further, a few studies tested the influences of the Covid-19 on faith-based investment. Therefore, the present study motivates us to examine the influences of the recent Covid-19 on the faith-based sectoral indices and their counterpart indices over the period from 1 st October 2010 to 29 th October 2020.

Additionally, the study tries to divide the study period into the overall and the pandemic period and investigates the behavior of the indices for the same period. In particular, we test whether the S&P Global 1200 Shariah sectoral indices outperform their counterpart indices during the recent pandemic period.

Faith-based stocks are screened by the Rating Intelligence Partners (RI) based on sectorbased screens and accounting-based screens. Under business sector-based screens, the companies are not allowed in the business of advertising, media & entertainment, alcohol, financial, gambling, pork-related activities, pornography, tobacco, and trading of gold and silver as cash on a deferred basis. After screening the companies with sector-based screens, the remaining companies are screened with accounting-based screens. The accounting-based screens are (1) debt / market value of equity (36 months average) < 33 %, (2) accounts receivables / market value of equity (36 months average) < 49 %, cash and interest-bearing securities / market value of Equity (36 months average) < 33%, and non-permissible income other than interest income / revenue < 5% (source: S&P Global). Further, Islamic Finance J o u r n a l P r e -p r o o f Development report forecasts that the global Islamic finance assets grow at a rate of 14% per annum and are expected to reach USD 3.69 trillion by 2024.

The remaining paper is classified as follows: part 2 explores the review of the literature and part 3 aims to explore the data source and explain the suitable model of the study. Part 4 interprets the results with theoretical implications. Part 5 concludes our results and contribution.

COVID-19 is a hot topic in literature nowadays, and the stream of research of the pandemic and its effects is growing by day. In finance and economics, much of the contemporary research is compared to previous recessions. Some of the contemporary research has found that the daily growth rate in the number of confirmed and deceased cases of the Bai et al. (2020) supported that the volatility of the US, UK, Japan, and China markets has been increased due to the Covid-19 disease during the study period. Just and Echaust (2020) investigated the J o u r n a l P r e -p r o o f relationship between the US S&P500 stock returns and implied volatility, implied correlation, and liquidity during the Covid-19 period. They employed the two-regime Markov switching model and found that the S&P500 returns closely associated with implied volatility and implied correlation.

Thus far, the pandemic has affected the oil market more than the equity market . Gharib et al. (2020) examined the impact of the Covid-19 on the causal relationship between crude oil price and gold price over the period from January 4, 2020, to May 4, 2020.

They found that a bilateral contagion effect on oil and gold prices during the recent pandemic period.

Previous studies reported that the volatility of the global markets has been increased. In this context, the retail investors have sold-out the stocks with fear in the market. To support the evidence, Huo and Qiu (2020) reported that the overreaction of the stocks due to the Covid-19 lockdown is stronger for the stocks with lower institutional investors holdings in China.

On contrary, Ortmann et al. (2020) found that the trading activities of the investors have been increased by 13.9% when the Covidd-19 cases increased during the pandemic period.

However, a few studies support that some sectors and faith-based stocks outperform and earn a positive return during the pandemic period. In this context, Mazur et al., (2020) 

We use time-series data (table 1) of daily S&P 1200 Shariah and non-Shariah sectoral indices (retrieved from S&P Dow Jones Indices website),from 1 st October 2010 to 29 th October 2020.

We winsorized the outliers of the indices at the bottom 1% and the top 1% of the observation.

Then, the daily values of the indices are converted into the returns using equation 1.

Where Rt is the return of the S&P 1200 sectoral indices on day t, Pt is the price of the indices on day t, and Pt-1 is the price of the indices on day t-1. Initially, we check the stationarity of the return series of the indices and find that the return series is stationary at level. Next, to examine the impact of the Covid-19 on the return of the sectoral indices, we frame the following equation.

J o u r n a l P r e -p r o o f Where Rt stands for the returns of the sectoral indices, αt is the intercept of the model and represents the average return of the index during the non-Covid-19 period. The βt is a slope of the model and explains the average return of the Covid-19 period over and above the non-Covid-19 period return. Covid19 is a dummy variable that takes value 1 during the Covid-19 pandemic period and 0 otherwise. The study considers the Covid-19 pandemic period from 1 st January 20202 to 29 th October 2020. Next, we employ the Fama and French (2015) fivefactor model to investigate whether the S&P 1200 sectoral Shariah indices yield an abnormal return over the S&P 1200 sectoral common indices during the study period. Fama and French (2015) claim that the five-factor model is superior to the three-factor model proposed by them in early 1993. We apply the same model to our date set as below;

Where Rt is the return of the index, and α represents the intercept of the model and explains the abnormal return of the index. The β1 is the coefficient of the market factor that explains the systematic risk of the index. The market factor is created by taking the return difference between the market return and the risk-free rate of return. The β2 is the coefficient of the size factor (SMB) that represents the return difference between the stocks with small market capitalization and the stocks with high market capitalization. The β3 stands for the coefficient of the value factor (HML) that is the return difference between the stocks with high value and the stocks with low value. The β4 explains the coefficient of the profitability factor (RMW) that is the difference in the returns between robust stocks and weak stocks. The β5 reveals the coefficient of the investment factor (CMA) that is the difference between the returns of the conservative stocks and aggressive stocks. The factor variables such as market, size, value, profitability, and investment factors are extracted from Kenneth R. French's data library.

Additionally, we examine the impact of the Covid-19 on the return of the S&P 1200 Shariah and non-Shariah sectoral indices using the Fama and French (2015) five-factor model. The study employs the following model by incorporating the dummy variable;

Where β6 stands for the coefficient of the Covid-19 dummy variable that takes value 1 during the Covid-19 pandemic period and 0 otherwise. Moreover, we examine the impact of the

Covid-19 pandemic on the volatility of the indices using the Autoregressive Conditional Heteroskedastic (ARCH) and Generalised Autoregressive Conditional Heteroscedastic (GARCH model). The ARCH model proposed by Engle (1982) defines that the predicted variability of the stock return depends on its own squared lagged error terms. However, Bollerslev (1986) suggested the generalized version of the ARCH model and empirically documents that the predicted conditional variance of the stock return is a function of its own lagged error terms (εt 2 ) and lagged conditional variance (ht 2 ). Moreover, Bollerslev et al. (1992) suggested that the GARCH (1,1) model is an excellent model for a wide range of financial data. Accordingly, we try to examine the influences of the Covid-19 pandemic on the volatility of the S&P 1200 Global Shariah and non-Shariah sectoral indices using the following GARCH (1,1) model.

Where Rt is the return of the index at the time t, Rt-1 is the previous day return of the index, and is the error term of equation 5. The ht-1 is the conditional volatility of the model. Further, the model assumes that the coefficient 0 > 0, 1 ≥ 0, 1 ≥ 0, and 1 + 1 < 1.

Moreover, the sum of the ARCH and GARCH coefficient (1 + 1) indicates the persistence of the volatility of the indices in the future period. Besides, the size of the ARCH and GARCH coefficients measure the short-run prediction of the volatility of the return. The large GARCH coefficient indicates that the volatility of the return is persistent and the shocks to the conditional volatility take a long time to die out in the markets. The ARCH coefficient indicates that the volatility of the return responses according to the market reaction.

Additionally, the  represents the coefficient of the Covid-19 dummy variable and measures whether the Covid-19 pandemic affects the volatility of the S&P 1200 Global Shariah and non-Shariah indices over the study period.

This section reports the summary statistics of the S&P 1200 Shariah and Non-Shariah sectoral indices over the period from 1 st October 2010 to 29 th October 2020. The results are presented in Tables 2 and 3 . Further, the data period is divided into two parts as the overall period and the covid-19 period. We consider the Covid-19 period that covers from 1 st January 2020 to 29 th October 2020. Table 2 reports the summary statistics of the S&P 1200 Shariah and non-Shariah indices for the overall period. The results show that the S&P 1200 IT sector provides a higher return of 0.066% with a standard deviation of 1.006%, whereas the energy sector earns a lower return of -0.009% with a standard deviation of 1.236%. Since the government and business organizations have advised their employees to work from home, the IT sector efficiently yields a positive return. In contrast, the S&P 1200 Shariah financial sector earns a higher average return of 0.068% with a standard deviation of 1.076%. Further, the S&P 1200 Shariah consumer staples, financials, industrial, and utility indices provide higher returns than their counterpart indices during the overall period. The value of the Skewness is negative, and the kurtosis is more than 3 for the indices. Further, the JB test is highly significant at the 1% level. It shows that the return series is not normally distributed over the study period. 

J o u r n a l P r e -p r o o f Next, we test for the equality of means and variances of the S&P 1200 non-Shariah and Shariah indices during the overall and the Covid-19 pandemic periods. The results of Table 4 show that the means difference between the sectoral indices is insignificant for the overall and pandemic periods. Further, we observe that the variances are statistically different for the communication, energy, financials, industrials, materials, and utility sectors. It infers that even the returns are not statistically significant, but the risk is minimized for the selected Shariah sectoral indices. In another way, we evidence that Shariah investments offer the lowest risk at the same level of returns in the global market. Further, the results confirm that ethical investment provides an opportunity for global investors to diversify their overall portfolio risk. In the case of Shariah indices, the coefficient of the S&P 1200 Shariah communication, consumer discretionary, financials, IT, materials sectors are positive and earn higher returns during the pandemic period. Also, the results indicate that the energy sector is heavily affected during this period. Further, the study reports evidence that the Shariah sectoral indices earn a higher return than their counterpart indices during the study period. The overall results reveal that ethical investment like shariah based investment is one of the best alternatives to global investors to maximize the return and diversify the risk.

This section reports the results of the Fama and French (2015) five-factor model that is applied to examine the performance of the S&P 1200 Shariah and non-Shariah sectoral indices over the study period. Fama and French (2015) report that the five-factor model is superior to their three-factor model. Hence, we apply this model and the results of the model for the non-Shariah sectoral indices are presented in Table 6 . The estimated results show that the intercepts of the communication and energy sectors are negatively significant and suggest that asymmetric information exists in these sectors. Further, the market risk factor is positive and highly significant for all sectoral indices. Besides, the size, value, profitability, and J o u r n a l P r e -p r o o f investment factors are positively significant for some sectors and negatively significant for the rest of the sectors. It shows that the five-factor model explains the variation of the returns of the S&P 1200 sectoral indices over the study period. We can assume thatCovid-19 affects these sectors negatively. Therefore, we suggest the investors keep away from these sectors during the pandemic period. indices are affected less than their counterpart indices during the Covid-19 period. Therefore, we suggest the investors to consider the Shariah stocks to maximize the returns and minimize the risk of the portfolios even during the crisis and the pandemic periods.

In this part, we test the impact of the Covid-19 on the volatility of the S&P 1200 Shariah and non-Shariah sectoral indices using the GARCH (1,1) model. Bollerslev et al. (1992) empirically document that the GARCH (1,1) model is an excellent model to predict the volatility of the financial variables. The results of the GARCH model with the Covid-19 dummy variable are reported in Table 10 . Before applying the GARCH model, we checked the stationarity and the ARCH effect using the ARCH LM test. We observe that the return series is stationary at a level and the ARCH effect exists in the series. Later, we apply the GARCH model and the results of the model show that the ARCH and GARCH coefficients are highly significant at the 1% level. The sum of the ARCH and GARCH coefficient is less than one and implies that the volatility of the indices is persistent for the future period.

Therefore, we may predict the volatility of the Shariah and non-Shariah indices in the future.

The coefficients of the Covid-19 dummy variable are highly significant for the Shariah and non-Shariah sectoral indices. The magnitude of the GARCH coefficient for the Shariah sectoral indices such as consumer discretionary, energy, healthcare, industrials, and IT are lower than their counterpart indices over the study period. It confirms that on average, the volatility of the Shariah indices is less than their counterpart indices. Also, the magnitude of the Covid-19 dummy coefficients is highly significant and lower for the Shariah consumer discretionary, energy, healthcare, industrials, materials, and utility indices than their counterpart indices. The results suggest that the volatility of these sectors is lower even during the pandemic period. We suggest the global investors consider the Shariah stocks from these sectors to rebalance their portfolio.

In this section, we check the volatility of the S&P 1200 Shariah and non-Shariah sectoral Table 11 and show that the ARCH and GARCH coefficients are highly significant and confirm the forecasting ability of the model. Further, the sum of the ARCH and GARCH coefficients is less than one and reveals the persistence of the volatility. Moreover, the magnitude of the GARCH coefficients of the Shariah sectoral indices such as the communication, consumer staples, financials, industrials, materials, and utilities are less than the coefficients of their counterpart indices during the Covid-19 pandemic period. It confirms that on average, the volatility or risk of the Shariah indices is less even during the pandemic period. Finally, we suggest the investors consider an ethical investment to protect their investment during the crisis and the pandemic period.

We confirms that the serial correlation is not observed in the residual of the estimated model.

The recent Covid-19 pandemic affects all economic, business, and financial activities around the world. However, Mazur et al. (2020) report that natural gas, food, healthcare, and software stocks earn positive returns during the pandemic period. Singh (2020) empirically documents evidence that the environmental, social, and governance stocks (ESG stocks) also provides a higher return during the Covid-19 period. Interestingly, Sherif (2020) Fama and French (2015) claim that the five-factor model is superior to the three-factor model proposed by them in early 1993.

range of financial data. The study finds that the S&P 1200 Shariah Communication, consumer staples, financials, healthcare, industrials, IT, materials, and utility sectors earn higher average returns than their counterpart sectoral indices during the Covid-19 period.

The magnitude of the GARCH coefficient for the Shariah sectoral indices such as consumer discretionary, energy, healthcare, industrials, and IT are lower than their counterpart indices over the study period. On average, the volatility of the Shariah indices is less than their counterpart indices. Also, the magnitude of the Covid-19 dummy coefficients is highly significant and lower for the Shariah consumer discretionary, energy, healthcare, industrials, materials, and utility indices than their counterpart indices. On average, the S&P Shariah sectoral indices provide a higher return with low risk in the global markets. We suggest investors incorporate the Shariah stocks based on the recommended sectors to their portfolios. The fund managers, portfolio managers, stockbrokers, and investment advisor may suggest and guide the investors to rebalance their portfolios by incorporating the Shariah stocks. Therefore, the risk will be diversified for a given expected return of the stocks.

All authors have participated in (a) conception and design, or analysis and interpretation of the data; (b) drafting the article or revising it critically for important intellectual content; and (c) approval of the final version.

This manuscript has not been submitted to, nor is under review at, another journal or other publishing venue.

The authors have no affiliation with any organization with a direct or indirect financial interest in the subject matter discussed in the manuscript. J o u r n a l P r e -p r o o f Note: Jarque-Bera is highly significant at the 1% level for the indices Note: *, **, and *** indicate significance at the 10%, 5%, and 1% levels respectively. The standard error of the coefficient is reported in the parentheses. Note: *, **, and *** indicate significance at the 10%, 5%, and 1% levels respectively. The standard error of the coefficient is reported in the parentheses.

Impact of the Covid-19 on the returns of the non-Shariah sectoral indices using the five-factor model Note: *, **, and *** indicate significance at the 10%, 5%, and 1% levels respectively. The standard error of the coefficient is reported in the parentheses.

Impact of the Covid-19 on the returns of the Shariah sectoral indices using the five-factor model Note: *, **, and *** indicate significance at the 10%, 5%, and 1% levels respectively. The standard error of the coefficient is reported in the parentheses. Note: We consider the two lags for the non-Shariah energy, non-Shariah healthcare, and Shariah financial indices and we reported ARCH (2) and GARCH (2) values in the above Table. The non-Shariah energy index has the value of the ARCH (1) of 0.060*** and GARCH (1) is 0.082***. The non-Shariah healthcare index has the value of ARCH (1) of 0.077*** and GARCH (1) of 0.080. The Shariah financials index has the value of ARCH (1) of 0.119*** and the GARCH (1) of 0.108.

*, **, and *** indicate significance at the 10%, 5%, and 1% levels respectively. The standard error of the coefficient is reported in the parentheses. Note: *, **, and *** indicate significance at the 10%, 5%, and 1% levels respectively. The standard error of the coefficient is reported in the parentheses. 

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