Risk–Return Profiles of Islamic Equities and Commodity Portfolios in Different Market Conditions

ABSTRACT

Motivated by the recent phenomenal growth in Islamic finance and the financialization of commodities, this study makes an initial attempt to investigate the risk–return profiles of optimized portfolios combining (a) Islamic equities with commodities and (b) conventional equities with commodities during the crises and noncrises periods. The findings tend to indicate that Islamic equity–commodity portfolios provide relatively higher diversification benefits than the conventional equity–commodity portfolios during the 1997 Asian Financial Crisis triggered by the financial sector compared to the 2008 global financial crisis triggered by the real housing sector. The findings further suggest that except for a few cases, commodities in general and gold in particular improve diversification benefits.

KEY WORDS:

• diversification
• dynamic conditional correlation
• Markowitz portfolio optimization
• Sharpe ratio
• unconditional correlation
• volatility

JEL CLASSIFICATION:

• G01
• G11
• G15

Acknowledgments

The authors are grateful to the participants of the conference as well as the editor (Prof. Ali Kutan) and the anonymous reviewer for their valuable comments that improved the quality of the article immensely.

Notes

The study reports the most important and critical results only due to page constraint. Supplemental results and tables are available upon request.

^1. Fifth Izmir Economic Congress was held between October 30 and November 1, 2013. The main theme of the Congress was “Turkish Economy in the light of the Global Economic Restructuring.”

^2. www.data.un.org.

^3. S&P Global BMI factsheet.

^4. “A Retrospective on the Stock Market in 2000.”

^5. Page 28, Commodity Market Review 1999–2000.

^6. Page 179, Global Economic Prospects 2003.

^7. Page 45, Cote d’Ivoire Post Election Crisis.

^8. Page 777, Malaysia Economy.

^9. Page 43, Global Economic Prospects 2009.

^10. Investors and speculators, through opening and closing positions on the futures markets, affect price dynamics and increase price volatility. However, their role is limited to the short run. Given the sample period under study, underlying fundamentals were key determinants of the oil price process. Incidentally, the IMF World Economic Outlook, September (Krichene 2006), could not establish evidence for a long-term effect of speculation on oil prices.

^11. World economy was reported to have grown at about 4–5% in real terms during 2002–2006. See International Monetary Fund, World Economic Outlook, September (Krichene 2006). As most countries are oil importers, depreciation of US dollar would increase oil demand.

^12. Residential consumption includes gas used in private dwellings for space heating, air-conditioning, cooking, water heating, and other household uses. Commercial consumption includes gas used by nonmanufacturing establishments such as hotels, restaurants, wholesale and retail stores, and natural gas vehicles. Industrial consumption includes gas used for heat, power, or chemical feedstock by manufacturing, mining, construction, and agriculture industries. Electric power consumption includes gas used as fuel in the electric power sector. For a complete definition of these categories, see www.eia.doe.gov.

^13. We do not report the detailed results of the unconditional correlation analysis here but results and analysis are available upon request.

^14. Dynamic conditional correlation figures are not presented here but available upon request.

^15. Page 1, BIS Quarterly Review, March 2011.

^16. We do not report the detailed results of correlation analysis here due to space constraint. However, results and analysis are available upon request.