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On the dynamic links between commodities and Islamic equity

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  • Nagayev, Ruslan
  • Disli, Mustafa
  • Inghelbrecht, Koen
  • Ng, Adam

Abstract

This paper investigates whether commodities offer potential diversification benefits for Islamic equity index investors in light of possible financialization of commodity markets. Using MGARCH-DCC and Wavelet Coherence analyses, our findings reveal that correlations between commodity markets and the Dow Jones Islamic Market World Index are time-varying and highly volatile throughout the January 1999–April 2015 period. A substantial and persistent increase was observed in the return correlations between commodities and Islamic equity at the onset of the 2008 financial crisis. However, trends in the recent two years suggest that this association is heading towards its pre-crisis levels, offering again diversification benefits for Islamic equity holders. These benefits vary across different commodities in various time scales. Overall, gold, natural gas, soft commodities, grains and livestock are better portfolio diversifiers than oil and other metals. Relative to medium-to-long term investors, short-term investors (less than 32days horizon) gained better diversification benefits in most commodities during bullish, bearish and market recovery periods. These findings have implications for investors who are heterogeneous in risk tolerance and time preference as well as for policymakers who are concerned with market stability.

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  • Nagayev, Ruslan & Disli, Mustafa & Inghelbrecht, Koen & Ng, Adam, 2016. "On the dynamic links between commodities and Islamic equity," Energy Economics, Elsevier, vol. 58(C), pages 125-140.
  • Handle: RePEc:eee:eneeco:v:58:y:2016:i:c:p:125-140
    DOI: 10.1016/j.eneco.2016.06.011
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    1. repec:eee:ememar:v:34:y:2018:i:c:p:42-63 is not listed on IDEAS
    2. repec:eee:mulfin:v:42-43:y:2017:i::p:152-163 is not listed on IDEAS
    3. Pal, Debdatta & Mitra, Subrata K., 2017. "Time-frequency contained co-movement of crude oil and world food prices: A wavelet-based analysis," Energy Economics, Elsevier, vol. 62(C), pages 230-239.
    4. El khamlichi, Abdelbari & HOANG, Thi Hong Van & Wong, Wing-Keung, 2017. "Is Gold Different for Islamic and Conventional Portfolios? A Sectorial Analysis," MPRA Paper 76282, University Library of Munich, Germany.
    5. repec:eee:eneeco:v:67:y:2017:i:c:p:454-475 is not listed on IDEAS
    6. repec:ers:journl:v:xx:y:2017:i:3b:p:153-164 is not listed on IDEAS
    7. Chen, Bai & Masih, Mansur, 2017. "Are the Islamic and conventional money markets really highly correlated ? MGARCH-DCC and Wavelet approaches," MPRA Paper 79886, University Library of Munich, Germany.

    More about this item

    Keywords

    Financialization; Diversification; Commodity; Islamic equity; Dynamic conditional correlation; Wavelet analysis;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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