IDEAS home Printed from
   My bibliography  Save this paper

Do Portfolio Diversification Opportunities exist across the Euro Zone Islamic Equity Markets? MGARCH-DCC and Wavelet Correlation Analysis


  • Ilhan, Bilal
  • Masih, Mansur


The economic process that Euro Zone countries have gone through created contradictory claims about whether those particular financial markets have converged, which has implications for the portfolio diversification issue for the investors and policy makers alike. Thus, this paper aims to examine whether there are opportunities for creating optimally diversified portfolios from the perspectives of the Islamic investors which is a missing point in the existing literature for the above-mentioned markets. The focus of the study is the correlations among the selected Shariah Indices‟ daily returns covering the period from April 2008 to March 2014, to illustrate not only the static picture, but the dynamic comovements which can be tested through the recent econometric methodologies (M-GARCH/DCC, MODWT, and CWT/WTC). Hence, the unique contribution of this research is the enhancement of the existing literature by empirically testing the „time-varying‟ and „scale dependent‟ volatilities and correlations of the particular markets by relying on the Shariah (Islamic) indices. By incorporating scale dependence, the paper is able to identify unique portfolio diversification opportunities for different set of investors bearing different investment horizons/holding periods of stock (e.g. weekly, monthly, quarterly, etc.) The overall result driven is that since there appears to be only continuous portfolio diversification opportunities between the French and Danish Islamic equity markets for up to six-month investment holding periods, in general, the possibility of portfolio diversification benefits for the short-, medium- and long-run does not seem to be available among these markets. This result implies that the Euro Zone financial markets are highly correlated/converged yielding minimal portfolio diversification benefits for all the heterogeneous investment horizons.

Suggested Citation

  • Ilhan, Bilal & Masih, Mansur, 2014. "Do Portfolio Diversification Opportunities exist across the Euro Zone Islamic Equity Markets? MGARCH-DCC and Wavelet Correlation Analysis," MPRA Paper 57688, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:57688

    Download full text from publisher

    File URL:
    File Function: original version
    Download Restriction: no

    References listed on IDEAS

    1. Gençay, Ramazan & Selçuk, Faruk & Whitcher, Brandon, 2001. "Differentiating intraday seasonalities through wavelet multi-scaling," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 289(3), pages 543-556.
    2. Bertero, Elisabetta & Mayer, Colin, 1990. "Structure and performance: Global interdependence of stock markets around the crash of October 1987," European Economic Review, Elsevier, vol. 34(6), pages 1155-1180, September.
    3. Longin, Francois & Solnik, Bruno, 1995. "Is the correlation in international equity returns constant: 1960-1990?," Journal of International Money and Finance, Elsevier, vol. 14(1), pages 3-26, February.
    4. Eun, Cheol S. & Lee, Jinsoo, 2010. "Mean-variance convergence around the world," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 856-870, April.
    5. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July.
    6. Gerald P. Dwyer & R. W. Hafer, 1988. "Are national stock markets linked?," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 3-14.
    7. Eun, Cheol S. & Shim, Sangdal, 1989. "International Transmission of Stock Market Movements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(02), pages 241-256, June.
    8. Driessen, Joost & Laeven, Luc, 2007. "International portfolio diversification benefits: Cross-country evidence from a local perspective," Journal of Banking & Finance, Elsevier, vol. 31(6), pages 1693-1712, June.
    9. Silvo Dajcman & Mejra Festic & Alenka Kavkler, 2012. "European stock market comovement dynamics during some major financial market turmoils in the period 1997 to 2010 -- a comparative DCC-GARCH and wavelet correlation analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 19(13), pages 1249-1256, September.
    10. Sheng-Yung Yang, 2005. "A DCC analysis of international stock market correlations: the role of Japan on the Asian Four Tigers," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 1(2), pages 89-93, March.
    11. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. repec:eee:quaeco:v:66:y:2017:i:c:p:212-224 is not listed on IDEAS
    2. Shakir, Zeeniya & Masih, Mansur, 2016. "How is the European debt crisis affecting islamic equity? challenges in portfolio diversification within the eurozone: A markov switching and continuous wavelet transform analysis," MPRA Paper 71683, University Library of Munich, Germany.

    More about this item


    International Portfolio Diversification; Euro Zone Islamic Stock Market Investments; M-GARCH/DCC; Wavelet analysis; CWT; MODWT;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:57688. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.