Are Islamic bonds a good safe haven for stocks? Implications for portfolio management in a time-varying regime-switching copula framework

Syed Jawad Hussain Shahzad · Chaker Aloui · Rania Jammazi · Muhammad Qaiser Shahbaz

43 citations0/0 files storedApplied Economics

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Islamic Finance and Banking Studies Financial Risk and Volatility Modeling Market Dynamics and Volatility

Abstract

We examine the portfolio implications of adding the Islamic bond index (Sukuk) to a benchmark portfolio of Islamic stocks. The daily data of the Islamic bond index; the Islamic stock markets of the world, Canada, Japan, USA, UK and Islamic financial stocks are used for the period of 1 October 2005 through 30 April 2015. We examine the presence of structural breaks via the Iterated Cumulative Sum of Square (ICSS) algorithm, which clearly indicate that Islamic stock-bond returns have several structural breaks over the sample period; hence, the dependence among the markets may have a regime-switching pattern. We rely on the flexible properties of the ARMA-FIGARCH models with the skew-t distribution to model the marginal distributions of the series. Next, a set of static, time-varying and regime-switching time-varying copula models are applied to encircle the dependence dynamics. Finally, using different portfolio strategies, we access the portfolio implications of a multi-asset portfolio. Overall, the results provide evidence that the Islamic bond index can be included as a potential hedge/safe haven in benchmark stock portfolios.

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References

1999An Introduction to Copulas 2007Optimal Versus Naive Diversification: How Inefficient is the 1/ N Portfolio Strategy?1996Fractionally integrated generalized autoregressive conditional heteroskedasticity 1998Modeling Asymmetric Comovements of Asset Returns 1994Autoregressive Conditional Density Estimation 2000State-Space Models with Regime-Switching: Classical and Gibbs Sampling Approaches with Applications 2014Stock market co-movements: Islamic versus conventional equity indices with multi-timescales analysis 2015Crises and contagion in Asia Pacific — Islamic v/s conventional markets

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