br Introduction One of the most

Introduction One of the most extensively studied areas in finance literature is stock market integrations. Cheng (2000) define stock market order Cardiogenol C as “the situation where markets moves together and have stable long run relationship”. There will be no potential diversification opportunities for investors, if the stock markets are integrated (Jebran, 2014). Similarly, investors cannot obtain benefits from arbitrage opportunities in case of perfect financial integration (Abbes & Trichilli, 2015). Therefore understanding the integration of stock markets is important for investors for decision making in international portfolios. The importance of exploring integrations of financial markets led many researchers to search for potential diversification opportunities across markets. Most of the studies are interested in exploring integrations of developed equity markets (Baele, 2002; Diebold & Yilmaz, 2009; Harris & Pisedtasalasai, 2006; Ng, 2000; Wagner & Szimayer, 2004; Xiao & Dhesi; 2010). There are also studies which investigate the integrations of emerging and developed equity markets (Beirne et al., 2009; Li and Majerowska 2008; Jebran 2014; Jebran & Iqbal, 2016). Few of the studies are contributed in investigating the integrations of Islamic equity markets with other markets (Arshad and Rizvi 2013; Nazlioglu, Hammoudeh, & Gupta 2015; Miniaoui et al. 2015; Majdoub and Mansour 2014; Saadaoui and Boujelbene 2015). Most of the studies are carried out after the US subprime financial crises, because the empirical evidences shows that Islamic stock indices perform better, and also provide potential diversification benefits in tranquil and turmoil period (Abbes & Trichilli, 2015). Saiti, Bacha, & Masih (2014) argue that Islamic stock indices performs better due to many specific features that includes exclusion of financial sectors, ethical and ration screenings, the limits of interest-based leveraged, and exclusion of conventional financial assets like derivatives etc. The aforementioned specific features may make an Islamic product less risky. It is generally argued that the features of Islamic stocks are different from conventional stocks because the former is based on Islamic Shariah criteria. Therefore the risk-return tradeoff will be also different and excretory system is important to explore the potential diversification opportunities across Islamic and conventional indices.
Islamic investment criteria The Islamic index (known as Karachi Meezan Index) in Pakistan is based on Shariah Compliant Criteria. The Islamic index includes 30 companies, which are selected on the basis of Shariah Compliant Criteria. The board members of Al Meezan Investment Management Limited provide the Shariah screening services. The Islamic Shariah Criteria in Pakistan is based on six screening criteria׳s. The first screening criterion is based on the fact that the core business of the company should not violate any principle of Shariah. Therefore the companies providing financial services on interest like insurance companies, leasing companies, conventional banks etc are not included in the Shariah. In addition, the companies selling or making products from pork, haram meat, and involved in gambling are also excluded from Shariah criteria. The second criterion is based on the idea that the interest bearing debt to assets ratio of the company should be less than 37%. The third screening criterion is that the non compliant investment to total assets ratio of the company should be less than 33%. The non Shariah compliant investment includes investment in commercial paper, bonds, interest bearing bank deposits, derivatives, and any other commercial interest bearing investments. The fourth criterion is that the non compliant income to total revenue of the company should be less than 5%. The non compliant income includes income from interest based transactions, income from derivatives, insurance companies or any other income from impermissible activities declared by Shariah. The fifth criterion is that the ratio of non-current assets to total assets should be less than 25%. The last criterion includes that the market price per share of the company should be equal to or greater than the net liquid asset per share. The net liquid asset per share is calculated by subtracting non-current assets and total liabilities from total assets and dividing by number of outstanding shares. These screening criteria are strictly followed for inclusion of a company in the Islamic index.