Global risk exposures and industry diversification with Shariah-compliant equity sectors

Abstract

This paper examines the risk exposures of ten major Islamic sector indexes with respect to shocks in global conventional markets. Utilizing a dynamic three-regime, three-factor risk spillover model, we generally observe positive risk exposures of Islamic equity sectors with respect to developed market shocks. Consumer Services, Oil & Gas and Technology, however, are found to exhibit negative risk exposures during crash periods, implying possible safe haven benefits for global investors. Both in-and out-of-sample results suggest that the portfolios supplemented with positions in Islamic equity sectors yield much improved risk adjusted returns, implying significant international diversification benefits. Financials, Healthcare, Telecommunication, and Utilities particularly stand out with relatively higher weights allocated in the optimal portfolios, implying the significance of these Islamic sectors in global diversification strategies.JEL Classification: C32, G11, G15

Geopolitical Risks and Movements in Islamic Bond and Equity Markets: A Note

“…Accordingly, several studies has raised the issue of whether Islamic securities can be regarded as an alternative to conventional assets. Using a dynamic three-regime and three-factor risk spillover model, Balcilar et al (2015) show that adding Islamic equity sectors to portfolios enhances risk adjusted returns. Importantly, the authors argue that Islamic consumer services, oil and gas and information technology exhibit negative risk exposure, especially during crash periods, implying potential safe-haven benefits.…”

“…Indeed, Islamic financial industry has experienced extraordinary growth over the last decade as the industry reached almost $1.86 trillion by the end of 2014 (Azmat et al, 2017), while the total value of Islamic finance assets under management is predicted to reach $6.5 trillion by 2020 (Balcilar et al, 2015). Islamic securities are distinctive assets that englobe only financial assets that comply with Islamic law (Shari'ah).…”

Nexus between risk sharing vs non-risk sharing financing and economic growth of Bangladesh

“…The role of commodities as portfolio diversifier has been studied in the literature (Balcılar et al, 2015;Mensi et al, 2016;Nagayev et al, 2016). Balcılar et al (2015) discovered significant benefits from portfolio diversification attributable to Islamic equities sectors. Specifically, the paper showed that oil & gas, technology, and consumer services have negative correlations during crisis periods, suggesting possible benefits of safe haven instruments for investors.…”

A Review of Islamic Investment Literature

“…However, there are other outcomes of the risk exposure of 10 Islamic sector indices that had a positive relationship with developed market shocks and a negative relationship with three other sectors (oil and gas, technology and consumer goods) during the crisis (Balcilar et al, 2015). The findings relating to these three sectors indicate that Islamic equity provides a safe haven for investors, especially during a crisis, and also support their conclusion that Islamic finance has low-risk exposure to conventional global finance.…”