Volatility in Returns of Islamic and Commercial Banks in Pakistan

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1 Volailiy in Reurns of Islamic and Commercial Banks in Pakisan Muhammad Iqbal Non-Linear Time Series Analysis Prof. Rober Kuns Deparmen of Economic, Universiy of Vienna, Vienna, Ausria

2 Inroducion Islamic banking has experienced global annual growh rae of 0-5 % during he las decade (Sole 2007) According o he survey of The Bankers Top 500 Islamic Financial Insiues, Islamic finance has grown by 8.85% from 2009 o 200. The growh was 28.64% from 2008 o Islamic finance has held a compound annual growh rae (CAGR) of 23.46% from 2006 o 200. Abou 00 Islamic Financial Insiues are presen in 5 Counries. These counries also include Non-Muslim counries like UK, USA, Germany and Swizerland. On March 4, 2009 The Vaican said banks should look a he rules of Islamic finance o resore confidence amongs heir cliens a a ime of global economic crisis. The ehical principles on which Islamic finance is based may bring banks closer o heir cliens and o he rue spiri which should mark every financial service, (Bloomberg) 2

3 Hisory of Islamic Banking: The hisory of Islamic finance goes back o 8h cenury. The firs modern experimen wih Islamic banking was underaken undercover, wihou agging Islamic image in Egyp in 963. Islamic Developmen Bank esablished in 975 o suppor projecs of Islamic banking in member counries. Dubai Islamic Bank was he firs modern commercial Islamic bank, opened is doors in 975. Volailiy: The measure of he range of an asse s price abou is mean level over a fixed amoun of ime. I is linked o he variance of an asse s price. The greaer he volailiy, he greaer is he risk. 3

4 Daa: Karachi sock exchange (KSE 00 index), from he web sie brecorder.com The banks are divided ino wo groups based upon he marke capializaion. Group consiss of he larges banks of each of hree subdivisions. Group 2 include he second larges banks of he subdivisions. Group : Group 2: Meezan Bank (Islamic) Habib Bank (Islamic + Convenional) Allied Bank (Convenional Bank Islami (Islamic) MCB Bank (Islamic + Convenional) Unied Bank (Convenional 4

5 Mehodology: EGARCH model inroduced by Nelson (99) is used o measure he volailiy in he sock reurns. Advanages of EGARCH: Capure he asymmery in he effecs of good and bad news (Leverage effec) No resricion of non-negaiviy on parameers Capures he persisence of he shock Reduce he effecs of ouliers. 5

6 k i i i RE RE 2 / 0 q j r k k k k p i i i i j j 2 2 ) log( ) log( Mean Equaion: Mehodology: EGARCH (p, q) Condiional Variance Equaion: 6

7 Resuls Group Group 2 Meezan Bank α (-2.05)* Habib bank (-0.56) Allied bank (-0.3) Bank Islami α (-4.09) MCB Bank (-0.2) Unied Bank (-0.4)* ω (-8.75)* (-0.9)* (-8.67)* ρ (7.04)* (2.46)* (8.80)* γ (.04) (.52) (-0.84) β (4.20)* (63.87)* (5.79)* AIC ω (-0.09)* (-6.62)* (-7.76)* ρ (0.43)* (7.25)* (9.25)* γ (-3.06)* (-2.7)* (0.80)* β (78.57)* (38.37)* (59.04)* AIC * Significan a % * Significan a % 7

8 Resuls Group Meezan Bank Habib Bank Alied Bank

9 Resuls Descripive Saisics: Group Meezan Bank Habib bank Allied bank Mean Median Maximum Minimum Sd.Dev Skewness Kurosis Jarque-Bera Probabiliy Sum Sum Sq. Dev. 2.39E E Observaions

10 Resuls Group Bank Islami MCB Bank Unied Bank 0

11 Resuls Descripive Saisics: Group 2 Bank Islami MCB bank Unied bank Mean Median Maximum Minimum Sd.Dev Skewness Kurosis Jarque-Bera Probabiliy Sum Sum Sq. Dev E E-05 Observaions

12 Resuls Discussion and Conclusion For he group convenional bank has he lowes mean bu has high dispersion as compared o oher wo banks. Islamic bank in his group has he lowes dispersion in volailiy. For group 2 Convenional bank has he lowes dispersion in volailiy. If we compare all he six banks hen he Islamic bank of group has he lowes volailiy and convenional bank of group 2 is second in low volailiy. The Islamic bank of group 2 is he las one according o he above ranking. I can be said ha i depends upon he individual banks raher han he ype of bank. 2

13 References Nelson, D. B. (99) Condiional heeroskedasiciy in asse reurns: A new approach Economerica Vol. 59, PP: Nonlinear Time Series: Nonparameric and Parameric Mehods by Fan, Jianqing and Yao, Qiwei, Published by Springer. Sole, Juan ( July 2007), Inroducing Islamic Banking ino Convenional Banking Sysem, IMF Working Paper. Yusof, M. Rosylin and Majid M. Shabri (2007) Sock Marke Volailiy Transmission in Malaysia:Islamic Versus Convenional Sock Marke, J.KAU: Islamic Econ., Vol. 20, No. 2, PP: 7-35 Top 500 Islamic Financial Insiuions, The Banker, Published on November 24, 200. hp://www.bloomberg.com/apps/news?pid=newsarchive&sid=aosole8uinog&refer=ialy 3

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