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Global risk exposures and industry diversification with Shariah-compliant equity sectors

Mehmet Balcilar, Riza Demirer and Shawkat Hammoudeh

Pacific-Basin Finance Journal, 2015, vol. 35, issue PB, 499-520

Abstract: This paper examines the risk exposures of ten major Islamic sector indexes with respect to shocks in global conventional markets. Utilizing a dynamic three-regime, three-factor risk spillover model, we generally observe positive risk exposures of Islamic equity sectors with respect to developed market shocks. Consumer Services, Oil & Gas and Technology, however, are found to exhibit negative risk exposures during crash periods, implying possible safe haven benefits for global investors. Both in- and out-of-sample results suggest that the portfolios supplemented with positions in Islamic equity sectors yield much improved risk adjusted returns, implying significant international diversification benefits. Financials, Healthcare, Telecommunication, and Utilities particularly stand out with relatively higher weights allocated in the optimal portfolios, implying the significance of these Islamic sectors in global diversification strategies.

Keywords: Islamic equity sectors; Multivariate regime-switching; Time-varying correlations; Financial integration; International portfolio diversification (search for similar items in EconPapers)
JEL-codes: C32 G11 G15 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1016/j.pacfin.2015.09.002

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