On the dynamic links between commodities and Islamic equities: an extended analysis

Ruslan Nagayev, Mustafa Disli and Edib Smolo

Chapter 15 in Islamic Finance and the Pursuit of Sustainable Prosperity, 2025, pp 339-363 from Edward Elgar Publishing

Abstract: The paper examines the diversification potential of commodities in Shariah-compliant portfolios during periods of significant market turbulence, including the Global Financial Crisis (GFC), COVID-19 pandemic Global Health Crisis (GHC), energy market disruptions, and geopolitical conflicts. We investigate the time-varying co-movements between the Dow Jones Islamic Market World Index (ISLX) and major commodity markets from 1999M01 to 2023M08. Employing wavelet coherence and interconnectedness methodologies, the analysis reveals that these relationships exhibit substantial temporal variation, with notable intensification during the GFC and GHC, followed by a recent reversion toward pre-crisis patterns, suggesting renewed diversification opportunities for Islamic equity investors. Our results demonstrate heterogeneous diversification benefits across commodity classes and investment horizons. As compared to crude oil and industrial metals, gold, natural gas, soft commodities, grains, and livestock emerge as superior portfolio diversifiers. The diversification gains are particularly pronounced for short-term investors across all major commodity segments during various market conditions. Interconnectedness analysis reveals Islamic equities, energy and soft commodities as net shock recipients, while most industrial metals and select agricultural commodities (corn, soybeans) function as net shock transmitters, with gold and silver exhibiting contrasting behaviors. These findings carry important implications for portfolio management strategies and market stability considerations, offering valuable insights for both institutional investors and policymakers concerned with financial market stability.

Keywords: Portfolio diversification; Islamic finance; Commodities; Interconnectedness; Wavelets (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035349678
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