Four Essays on Optimal Sustainable and Shariah Investment in Indonesia

Abstract

Sustainable Responsible Investment (SRI) is expected to provide not only financial and social impact but also sustainable benefits in the long run. An investor must consider between the fund performance and volatility in a crisis. This study will try to fill the above-mentioned gaps focusing on how sustainable and Shariah investment in Indonesia can achieve the SDGs by developing various strategic options to optimize the portfolio model from 2009 to 2020. The first essay aims to compare the performance with the ratio of Sharpe versus Coefficient Variance (CV) and to estimate the determinants and correlations between the return and volatility of SRI and Shariah considered to be another kind of ethical index. The framework also applies the ARIMA model and the volatility- asymmetric model with additional exchange rate and crisis-period data to determine the return and volatility of each index, which is generalized by the Asymmetric E- GARCH. The study showed that only SRI-KEHATI and LQ45 were affected by the highest volatility during the Covid-19 crisis. The impact of the exchange rate and the consequences of the recession on yields and uncertainty is insignificant on Sharia, which is applicable to the high-risk and high-return theory. The second essay discusses the reaction of mixture variables to the ESG Index in Indonesia's business climate since Environmental, Sustainable Governance (ESG) as another perspective of the Sustainable Responsible Investment Index (SRI) is on a global trend. The VAR VECM model was used to research the relationship between the ESG and other endogenous variables: Dow Jones index, Fed rate, JCI index, exchange rate, and BI-rate. The market-based impact analysis on Indonesia's SRI Index will not only benefit investors' portfolio and risk management plans, but will also have significant implications for regulators, in particular the Financial Services Authority (FSA or OJK) of Indonesia and the Bank of Indonesia. The third essay reveals that SRI-KEHATI has the highest average risk and return among others. It also demonstrates that SRI-KEHATI is ideally suited to gain financial, social and ethical returns at the same time. We also find from the Mann- Whitney and Kruskal-Wallis U test that one of the reasons for the success of SRI- KEHATI is the major allocation to the four major banks. There is a significant difference between SRI-KEHATI and the results of the four banks that have been market movers all the while, so investors can choose a cherry pick approach that focuses on those stocks instead. The fourth essay innovates the replacement of the SRI-KEHATI and JII index members with two Islamic bank stocks shown that their performance is superior with manageable risk. The return of the Shariah SKEHATI index is higher than the return of the previous SRI-KEHATI index with a lower standard deviation. This also means that two Islamic banks boost return and remove mafsadat, purifying the SRI-KEHATI Index to become more Sharia. The addition of two Islamic bank stocks in the Jakarta Islamic Index has raised the return, variance, and standard deviation in the same Shariah universe. Granger Causality's results concluded that Shariah is significantly the leading predictor and clear superiority as JII is continuously Granger caused SRI-KEHATI and modified SRI-KEHATI, whereas the modified JII only affects the modified SRI-KEHATI. These results are the signals of improvements towards achieving SDGs.