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Analysing dynamic linkages and hedging strategies between Islamic and conventional sector equity indexes

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  • Walid Mensi
  • Shawkat Hammoudeh
  • Ahmet Sensoy
  • Seong-Min Yoon

Abstract

This study analyses the dynamic spillovers across 10 Dow Jones Islamic and conventional sector index pairs. Using various multivariate GARCH models, the results show significant time-varying conditional correlations for all the pairs. Moreover, there is evidence that the conditional correlations for all the sector pairs, except those of the Telecommunication and Utilities sectors, increase after the onset of the global financial crisis (GFC), suggesting non-subsiding risks, contagion effects and gradual greater financial linkages. The Islamic sectors’ risk exposure can be effectively hedged over time in diversified portfolios containing conventional sector stocks. These results provide several practical implications for portfolio managers and policymakers in regard to optimal asset allocations, portfolio risk management and the diversification benefits among these markets.

Suggested Citation

  • Walid Mensi & Shawkat Hammoudeh & Ahmet Sensoy & Seong-Min Yoon, 2017. "Analysing dynamic linkages and hedging strategies between Islamic and conventional sector equity indexes," Applied Economics, Taylor & Francis Journals, vol. 49(25), pages 2456-2479, May.
    • Handle: RePEc:taf:applec:v:49:y:2017:i:25:p:2456-2479
    DOI: 10.1080/00036846.2016.1240349
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    Cited by:

    1. Khan, Abdullah & Rizvi, Syed Aun R. & Ali, Mohsin & Haroon, Omair, 2021. "A survey of Islamic finance research – Influences and influencers," Pacific-Basin Finance Journal, Elsevier, vol. 69(C).
    2. Rahman, Md Lutfur & Hedström, Axel & Uddin, Gazi Salah & Kang, Sang Hoon, 2021. "Quantile relationship between Islamic and non-Islamic equity markets," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    3. Salokhiddin Avazkhodjaev & Farkhod Mukhamedov & Jaloliddin Usmonov, 2022. "Do Energy and Gold Markets Interact with Islamic Stocks? Evidence from the Asia-Pacific Markets," International Journal of Energy Economics and Policy, Econjournals, vol. 12(3), pages 197-208, May.
    4. Azra Zaimovic & Adna Omanovic & Almira Arnaut-Berilo, 2021. "How Many Stocks Are Sufficient for Equity Portfolio Diversification? A Review of the Literature," JRFM, MDPI, vol. 14(11), pages 1-30, November.
    5. Muhammad Anas & Ghulam Mujtaba & Sadaf Nayyar & Saira Ashfaq, 2020. "Time-Frequency Based Dynamics of Decoupling or Integration between Islamic and Conventional Equity Markets," JRFM, MDPI, vol. 13(7), pages 1-27, July.
    6. Alexakis, Christos & Kenourgios, Dimitris & Pappas, Vasileios & Petropoulou, Athina, 2021. "From dotcom to Covid-19: A convergence analysis of Islamic investments," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    7. Hoang, Thi-Hong-Van & Zhu, Zhenzhen & El Khamlichi, Abdelbari & Wong, Wing-Keung, 2019. "Does the Shari’ah screening impact the gold-stock nexus? A sectorial analysis," Resources Policy, Elsevier, vol. 61(C), pages 617-626.
    8. Umar, Zaghum & Mokni, Khaled & Escribano, Ana, 2022. "Connectedness between the COVID-19 related media coverage and Islamic equities: The role of economic policy uncertainty," Pacific-Basin Finance Journal, Elsevier, vol. 75(C).
    9. Al-Yahyaee, Khamis Hamed & Mensi, Walid & Rehman, Mobeen Ur & Vo, Xuan Vinh & Kang, Sang Hoon, 2020. "Do Islamic stocks outperform conventional stock sectors during normal and crisis periods? Extreme co-movements and portfolio management analysis," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    10. Haddad, Hedi Ben & Mezghani, Imed & Al Dohaiman, Mohammed, 2020. "Common shocks, common transmission mechanisms and time-varying connectedness among Dow Jones Islamic stock market indices and global risk factors," Economic Systems, Elsevier, vol. 44(2).
    11. Delle Foglie, Andrea & Panetta, Ida Claudia, 2020. "Islamic stock market versus conventional: Are islamic investing a ‘Safe Haven’ for investors? A systematic literature review," Pacific-Basin Finance Journal, Elsevier, vol. 64(C).

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