Tempered stable models for Islamic finance asset management
International Journal of Islamic and Middle Eastern Finance and Management
ISSN: 1753-8394
Article publication date: 14 April 2014
Abstract
Purpose
In Islamic finance (IF), the safety-first rule of investing (hifdh al mal) is held to be of utmost importance. In view of the instability in the global financial markets, the IF portfolio manager (mudharib) is committed, according to Sharia, to make use of advanced models and reliable tools. This paper seeks to address these issues.
Design/methodology/approach
In this paper, the limitations of the standard models used in the IF industry are reviewed. Then, a framework was set forth for a reliable modeling of the IF markets, especially in extreme events and highly volatile periods. Based on the empirical evidence, the framework offers an improved tool to ameliorate the evaluation of Islamic stock market risk exposure and to reduce the costs of Islamic risk management.
Findings
Based on the empirical evidence, the framework offers an improved tool to ameliorate the evaluation of Islamic stock market risk exposure and to reduce the costs of Islamic risk management.
Originality/value
In IF, the portfolio manager – mudharib – according to Sharia, should ensure the adequacy of the mathematical and statistical tools used to model and control portfolio risk. This task became more complicated because of the increase in risk, as measured via market volatility, during the financial crisis that began in the summer of 2007. Sharia condemns the portfolio manager who demonstrates negligence and may hold him accountable for losses for failing to select the proper analytical tools. As Sharia guidelines hold the safety-first principle of investing rule (hifdh al mal) to be of utmost importance, the portfolio manager should avoid speculative investments and strategies that would lead to significant losses during periods of high market volatility.
Keywords
Acknowledgements
The authors gratefully acknowledge the research support of Mohamed Charfi, Saida Ben Abdelhamid, Dr Sami Al-Suwailem and Dr Ridha Saadallah. The authors also thank the referee of this paper for providing numerous valuable comments that have helped to improve the paper.
Citation
Bekri, M., Shin (Aaron) Kim, Y. and (Zari) T. Rachev, S. (2014), "Tempered stable models for Islamic finance asset management", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 7 No. 1, pp. 37-60. https://doi.org/10.1108/IMEFM-10-2012-0096
Publisher
:Emerald Group Publishing Limited
Copyright © 2014, Emerald Group Publishing Limited