Quantifying the connectedness and portfolio implications between Islamic and conventional bonds: Evidence from global and GCC regions

Md. Ruhul Amin, Md. Abdul Hakim, Md. Mamunur Rashid and Shaikh Masrick Hasan
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Md. Ruhul Amin: Department of Finance and Banking, Islamic University, Kushtia, Bangladesh
Md. Abdul Hakim: Department of Business Administration, Notre Dame University, Dhaka, Bangladesh
Md. Mamunur Rashid: Department of Finance, Jagannath University, Dhaka, Bangladesh
Shaikh Masrick Hasan: Department of Finance, Jagannath University, Dhaka, Bangladesh

Journal of Economic Analysis, 2022, vol. 1, issue 2, 1-16

Abstract: We explore the connectedness and portfolio implications between Islamic and conventional bonds in global and GCC regions. We also compare which bonds performed better during our sample period. Unlike previous studies, we focus on Islamic bond markets compared to their conventional counterparts and highlight the GCC bonds (Islamic and conventional) in respect of global bonds. We apply the DCC-GJR-GARCH (1,1) method, the Sharpe ratio, and the portfolio implications strategy over the period from September 1, 2013, to February 23, 2022. Our time-varying results suggest that the relationship among all variables varies over time, but most of them are positive, suggesting that there are fewer diversification opportunities between Islamic and conventional bonds. Hedging and diversification benefits are found only in the limited period among these variables, especially between GCC bonds and global bonds, and global Sukuk and GCC Sukuk. The findings of risk-adjusted returns reveal that Islamic bonds outperform their conventional counterparts. Moreover, mixed results are found in the case of hedging costs, and the majority of the fund, based on optimal weights, should be invested in Islamic bonds. Our study endows investors and regulators in the global and GCC markets with new insights on how to shield their investments and the financial system from financial crises through a hedging strategy with Islamic finance.

Keywords: Conventional bonds; Sukuk; Time-varying analysis; Portfolio implications (search for similar items in EconPapers)
Date: 2022
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