Dependence dynamics of Islamic and conventional equity sectors: What do we learn from the decoupling hypothesis and COVID-19 pandemic?

Abstract

The recent COVID-19 pandemic intensification generates a different set of challenges for global financial markets and portfolio management strategies. This paper uses network analysis to investigate the static and dynamic dependence within Islamic and conventional equity sectors. The study focuses on the decoupling hypothesis and how the dependence among sectors changes during COVID19. Empirical findings indicate a higher degree of spillover during the COVID19 sub-period. Islamic and conventional equities behave differently in terms of industry-level dependence during normal and crisis times, thus decoupling. Further, the dependence effect between conventional equity returns is stronger than Islamic equity returns during the COVID-19 pandemic. The finding of this paper has several significant implications for portfolio selection and risk management. Portfolios consisting of Islamic equity sectors including industrials, basic materials, consumer services, and technologies highlight low-diversification benefits across the entire sample period. Also, investment exposure to less connected Islamic and conventional equity sectors provides a good diversification strategy.

Connectedness of COVID vaccination with economic policy uncertainty, oil, bonds, and sectoral equity markets: evidence from the US

“…We contribute to the existing literature by examining the connectedness of the COVID-vaccination with the economic policy uncertainty (EPU), oil, bonds, and sectoral equity markets in the US. Previously a large number of studies focused on examining the impact of the COVID-19 pandemic on the EPU (Choi, 2020 ; Albulescu, 2021 ; Dai et al, 2021 ; Yousfi et al, 2021 ; Dou et al, 2022 ; Al-Shboul et al, 2022 ), oil (Mensi et al, 2020 ; Sharif et al, 2020 ; Cao & Cheng, 2021 ; Gharib et al, 2021 ; Yousaf, 2021 ; Jiang et al, 2021a , 2021b ; Atri et al, 2021 ), bonds (Andrieș et al, 2021 ; Arnold & Rhodes 2021 ; Gubareva 2021a , 2021b ; Gubareva et al, 2021 ; Yi et al, 2021 ; Elsayed et al, 2022 ; Arif et al, 2022 ), and sectoral equity markets (Baek et al, 2020 ; He et al, 2020a , 2020b ; Ahmad et al, 2021a , 2021b ; Qureshi 2021 ; Shahzad et al, 2021 ; Umar et al, 2021a ; Shahzad & Naifer, 2022 ). EPU in the US is measured using the daily data of US economic and policy-related news.…”

Connectedness between the COVID-19 related media coverage and Islamic equities: The role of economic policy uncertainty

“…2 As far as we know, this is the first research that analyses the dynamic return and volatility connectedness on the Islamic stock market during the ongoing COVID-19 pandemic crisis, by including a pandemic-related sentiment variable such as the Coronavirus MCI by applying the TVP-VAR methodology. First, this research simultaneously investigates not only the isolated effects on the connectedness of the Islamic stock market but also its interrelations by including main sectoral Islamic indices instead of comparing the effects among conventional and Islamic assets as in Umar et al (2022d) and Shahzad and Naifar (2022) , or rather than extending the analysis to country-specific indexes as in Mandaci and Cagli (2021) . This means that we are dealing with a robust set of ten series of indices values that allow us to study their connectedness and ensure that the main economic and activity sectors are included.…”

“…Our results also show strong pair-wise spillovers for both returns and volatility indices, indicating a high integration level. Second, contrary to those studies by Shahzad and Naifar (2022) and Umar et al (2022d) , we use a variable of media reporting about infectious diseases to analyze the effects of the COVID-19 crisis on the Islamic stock market, instead of using economic and macroeconomic variables. Our results suggest that the COVID-19 related media index transmits shocks to Islamic sectoral equity more than it receives, acting then as a net transmitter.…”

Portfolio Diversification Across Islamic Vs. Conventional Banks: The Role of Macroeconomic Fundamentals in Stock Volatility

“…Khan et al, 2017), or even across advanced and developing stock markets (Ayub, 2019;Jan et al, 2018). However, after the introduction of Islamic indices and Islamic banks in the '90s, researchers have also produced empirical studies that have compared both conventional and Islamic markets for diversification purposes (Shahzad & Naifar, 2022). This research is also conducted on comparative bases between Islamic and conventional banking systems and makes an addition to the existing body of knowledge in this area.…”