Does the degree of Shari'ah compliance affect the volatility? Evidence from the MENA region

Growing interest in Shari'ah compliant indices evolves with the surge in Islamic financial asset value over the past decades, and the need to understand how these indices perform in comparison with conventional ones. We focus our analysis on the MENA region and answer the following questions; Does the degree of Shari'ah compliance affect volatility? Does volatility behavior of Shari'ah-compliant portfolio different than volatility behavior of non-Shari'ah-compliant portfolio? We cover the period between 2003 and 2013, we decompose our sample into pre and post financial crisis, and we pursue a novel approach of distinguishing between different degrees of Shari'ah compliance. We analyze the difference in returns and volatility behavior of Shari'ah versus conventional portfolios. We use Component-GARCH to analyze difference in volatility behavior between Shari'ah and conventional portfolios. Our results show asymmetric impact of volatility behavior among the three portfolios in pre versus post financial crisis. In additional, volatility behavior alters as we compare the complete sample against pre and post financial crisis. The most compliant portfolio shows a reduction in the effect of short-run on long-run volatility. In addition, our result shows that the persistence in the long-run component deceases after the financial crisis in the most Shari'ah compliant portfolio.