Islamic financial (IF) industry is promising: Markets are increasingly appreciating Islamic instruments, the investors' demand on Sharia conform financial products is rising and more institutions are willing to provide Islamic services to their clients. Islamic finance proposes an effective strategy: Minimizing and controlling risk by having it integrated and embedded in real activities. Risk becomes controlled by real economy and real activities are simulated to generate sufficient wealth to compensate risk. The strategy helps then creating value and minimizing risk at once (Al-Suwailem. 2009).
More opportunities, more challenges
Risk is a challenge in both Islamic and conventional finance. On the one hand “Nothing ventured nothing gained” is the first principle of investment. Further, total absence of risk distorts incentives and hence deteriorates economic efficiency. On the other hand, excessive risk hurdles investment and deters growth.
Another challenge is the presence of kurtosis and skewness in the Islamic financial data and the rejection of the normal assumption. Therefore, the employment of adequate advanced methods in Islamic finance is essential. The stable and tempered stable distributions are suggested as alternatives, as they show promising results, inter alia: the improvement of the performance of the Islamic finance risk management tools and models (Bekri et al. 2014).
Furthermore, an accurate estimation of the tail risk is primordial from an IF perspective: The use of coherent risk measures, allows better analysis of the tail risk in IF and may be used for both IF portfolio optimization and IF performance measures (Al-Suwailem. 2006, Rachev et al. 2008).
Seminarthemen / Topics of this seminar
Introduction to Islamic Finance
Risk, Uncertainty and Gharar
Islamic financial markets, Islamic financial data
Heavy tail distributions and the estimation of tail risk
Coherent risk measures, employment in IF portfolio optimization
Al-Suwailem, Sami. (2006) "Hedging in Islamic Finance" Islamic Development Bank. King Fahad National Library Cataloguing-in-Publication Data
Al-Suwailem (2009) "Tenets of the Islamic Economic System" Encyclopedia of Islamic Economics, edited by Abdelhamid Brahimi and Khurshid Ahmed, Volume 2, UK, pp. 235-245.
Bekri. M, Kim. Y.S., Rachev. S.T. (2014,a). "Tempered stable models for Islamic Finance asset management". International Journal of Islamic and Middle Eastern Finance and Management volume 7, no 1.
Bekri. M, Kim. Y.S. (2014,b) "Portfolio management with heavy-tailed distributions in Islamic Finance" Islamic Economics, Banking and Finance (JIEBF), volume 10, no 2.
Rachev. S. T., Stoyanov. S., Fabozzi, F. (2008), ''Advanced Stochastic Models, Risk Assessement, and Portfolio Optimization.'' John Willey and Sons, New Jersey.
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