Volatility linkages and value gains from diversifying with Islamic assets

Shumi Akhtar (), Farida Akhtar (), Maria Jahromi and Kose John ()
Additional contact information
Shumi Akhtar: University of Sydney
Farida Akhtar: Macquarie University
Kose John: New York University

Journal of International Business Studies, 2023, vol. 54, issue 8, No 6, 1495-1528

Abstract: Abstract Islamic assets, assets compliant with ethical and religious norms as codified in Sharia law, broaden the investor base. Do such investments contribute to mean-variance efficiency, and if so, how? Using daily data on stock, bond, and money market indices from nine Islamic countries and 37 non-Islamic ones from May 2007 to June 2010, we show that adding Islamic assets to an existing portfolio of conventional (non-Islamic) assets can expand the mean-variance frontier and thereby create additional value through diversification. The “specialness” of Islamic assets comes from a smaller set of common information and a lower degree of cross-market hedging between Islamic and conventional markets. This reduces volatility linkages between Islamic and conventional assets relative to volatility linkages between two conventional assets. Including one Islamic asset lowers volatility linkages by up to 3.16 percentage points after controlling for country-level fixed effects and time-varying characteristics. Low volatility linkages are key to increasing diversification benefits that arise from improvements in the global mean-variance portfolio. Our research contributes to the international business literature by highlighting the potential benefits of bridging religious, ethical, and cultural differences to add new markets to an incomplete international market structure and in so doing increase diversification benefits.

Keywords: diversification benefits; financial crisis; volatility linkages; Islamic finance; international markets; religion and culture; ESG; mean-variance spanning; stochastic volatility model (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1057/s41267-023-00641-y Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:jintbs:v:54:y:2023:i:8:d:10.1057_s41267-023-00641-y

Ordering information: This journal article can be ordered from
http://www.springer. ... nt/journal/41267/PS2

DOI: 10.1057/s41267-023-00641-y

Access Statistics for this article

Journal of International Business Studies is currently edited by John Cantwell

More articles in Journal of International Business Studies from Palgrave Macmillan, Academy of International Business
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().