Time varying correlation between Islamic equity and commodity returns: implications for portfolio diversification
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This paper aims at investigating the time varying relationship between Islamic equity and commodity returns in order to examine how combination of Islamic equities and commodities contribute to the benefits of portfolio investors and managers. In order to investigate this relationship, we employed multivariate GARCH method on return series of five different commodity groups (energy, precious metals, agricultural, non-ferrous metals and softs group), Dow Jones spot commodity index as a proxy of an aggregate commodity market and Dow Jones Islamic index over the period January 3, 2001 - March 28, 2013. Our findings show that correlations between commodity and Islamic stock markets’ returns change in different time periods and these two markets moved very closely during 2008 financial crisis in particular. Besides, volatility of returns in both markets reached at their peaks during the 2008 crisis period. We also show that despite sharing some common features, commodities cannot be considered as a homogeneous asset class: a speculation phenomenon is for instance, highlighted for energy sector comprising oil, while the safe-haven role of gold is evidenced, which constitutes a part of precious metal sector.
Islamic Capital Market , Commodity Market , Financial Crisis , Multivariate GARCH Dynamic Conditional Correlations
Khan, A. P., Kabir, S. H., Bashar, O. K. M. R., & Mohammed Masih, A. M. (2014). Time varying correlation between Islamic equity and commodity returns: implications for portfolio diversification. Journal of Developing Areas, Australian Academy of Business and Social Sciences, 49(5), pp. 1-17.
Australian Academy of Business and Social Sciences