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ABSTRACT
This study analyses the dynamic spillovers across 10 Dow Jones Islamic and conventional sector index pairs. Using various multivariate GARCH models, the results show significant time-varying conditional correlations for all the pairs. Moreover, there is evidence that the conditional correlations for all the sector pairs, except those of the Telecommunication and Utilities sectors, increase after the onset of the global financial crisis (GFC), suggesting non-subsiding risks, contagion effects and gradual greater financial linkages. The Islamic sectors’ risk exposure can be effectively hedged over time in diversified portfolios containing conventional sector stocks. These results provide several practical implications for portfolio managers and policymakers in regard to optimal asset allocations, portfolio risk management and the diversification benefits among these markets.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1 The Islamic industry screens are designed to prohibit certain economic activities such as alcohol, pork-related products, conventional financial services, entertainment, tobacco, weapons and defence. The financial ratio screens stipulate that the total debt divided by the trailing 24-month average market capitalization, sum of a company’s cash and interest-bearing securities divided by the trailing 24-month average market capitalization and accounts receivables divided by trailing 24-month average market capitalization should be less than 33% for all three ratios.
2 For the theoretical explanation on asymmetry or the leverage effect, see Black (Citation1976), Christie (Citation1982), Poterba and Summers (Citation1986) and Campbell and Hentschel (Citation1992).