INTEGRATION OF COUNTRY ISLAMIC INDEXES AND CONVENTIONAL EQUITY INDEXES: A CANONICAL CORRELATION ANALYSIS

Mohamed Albohali
Ibrahim Affaneh
Robert J. Boldin
Indiana University of Pennsylvania
ABSTRACT
Integration of equity markets around the world have been the subject of many studies for
the purpose of identifying the impact of integration level on international portfolio diversification
using different statistical methods. This study investigates the integration of eight developed
markets: Australia, Canada, France, German, Italy, Japan, UK and US with seven emerging
Middle Eastern Islamic markets: Amman Stock Exchange, Dubai Financial Market, Egyptian
Exchange, Istanbul Stock Exchange, Kuwait Stock Exchange, Saudi Stock Exchange and United
Arab Emirates. Canonical correlation analysis is used to test the relationships between two sets
of variables, i.e., the emerging Islamic markets (criterion), and the developed markets
(predictors). Results suggest that the intragroup integration is moderate, but the intergroup
integration is weak. These results imply that benefits from international portfolio diversification
can be enhanced when involving developed and emerging Islamic markets in portfolio
construction, rather than diversifying with one group only.