Portfolio analysis for diversification benefit: evidence from financial innovations

The rational and risk-averse investor diversifies the investment setting to curtail the risk exposure at a given level of return. As of now, it is a debatable issue to examine if conventional debt (bonds) and Islamic debt (sukuk) have diversification benefit in the global market. Therefore, holding the religiosity issue, ceteris paribus, this study attempts to examine if there is additive diversification benefit between conventional debt and Islamic debt instruments. To address the issue, along with developing an in-depth meta-analysis, we provide global evidence by time series analysis of dollar-denominated global indices of Dow Jones Sukuk Index and S&P 500 Bonds Index ranging between January 2015 and December 2022. Overall, the study documents that the market performance of sukuk is different from that of bonds without having significant correlation. Further, the underlying causality, cointegration, ARDL, and NARDL tests do not document significant pattern of affiliation between bonds and sukuk. In terms of risk–return profile, the mean difference and relative measurement of risk both are significant. Hence, the notable finding of the study suggests that there is the possible diversification benefit from constructing portfolio by bonds and sukuk. We believe that this finding might be a breakthrough for identifying diversification utility between sukuk and bonds which is hardly examined with global evidence. Therefore, this academic novelty contributes to market practitioners and policy makers in understanding the appropriate market behavior for an optimal investment decision.