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Tail dependence risk exposure and diversification potential of Islamic and conventional banks

Author

Listed:
  • Jose Arreola Hernandez

    (ESC [Rennes] - ESC Rennes School of Business)

  • Khamis Hamed Al-Yahyaee

    (SQU - Sultan Qaboos University)

  • Shawkat Hammoudeh

    (Drexel University)

  • Walid Mensi

    (SQU - Sultan Qaboos University)

Abstract

This paper undertakes a rolling window comparative analysis of risks for portfolios consisting of GCC Islamic and conventional bank indices. We draw our empirical results by employing canonical, drawable and regular vine copula models, as well as by implementing a portfolio optimization method with a conditional Value-at-Risk constraint. We find evidence of higher riskiness in the group of Islamic banks relative to the group of conventional banks across each of the financial rolling window scenarios under consideration. Specifically, a greater negative (nonlinear) tail asymmetric dependence is observed in the pairs of Islamic banks' relationships. The results also show that the optimal portfolio model supports a clear preference towards the group of conventional banks in regard to risk minimization and diversification benefits.

Suggested Citation

  • Jose Arreola Hernandez & Khamis Hamed Al-Yahyaee & Shawkat Hammoudeh & Walid Mensi, 2019. "Tail dependence risk exposure and diversification potential of Islamic and conventional banks," Post-Print hal-02194592, HAL.
    • Handle: RePEc:hal:journl:hal-02194592
    DOI: 10.1080/00036846.2019.1602716
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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. M. Kabir Hassan & Md Nurul Islam Sohel & Tonmoy Choudhury & Mamunur Rashid, 2024. "A systematic literature review of risks in Islamic banking system: research agenda and future research directions," Risk Management, Palgrave Macmillan, vol. 26(1), pages 1-29, February.
    3. Hanif, Waqas & Mensi, Walid & Vo, Xuan Vinh & BenSaïda, Ahmed & Hernandez, Jose Arreola & Kang, Sang Hoon, 2023. "Dependence and risk management of portfolios of metals and agricultural commodity futures," Resources Policy, Elsevier, vol. 82(C).

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