Co-movements and diversification opportunities among Dow Jones Islamic indexes

Monia Antar and Fatma Alahouel

International Journal of Islamic and Middle Eastern Finance and Management, 2019, vol. 13, issue 1, 94-115

Abstract: Purpose - This paper aims to analyse the opportunity of an exclusive investment in the DJ Islamic indexes. The objective is to characterize the links between MENA region index with seven DJ Islamic indexes. Design/methodology/approach - A co-movement analysis was conducted to assess whether there is a safe investment during crisis. The VECM verifies the existence of a long run association. The MGARCH-DCC characterizes the dynamic links. The wavelet coherence detects a correlation in a time-frequency domain, which is relevant to set up a diversification strategy based on investment horizons. Findings - Despite the existence of a long run association between the Islamic indexes, diversification opportunities are present. The MGARCH-DCC results recommend including the USA, Canada and Emerging Markets indexes with the Mena index to get diversification benefits. The Wavelet coherence confirms these results for 0 to 16 days holding period and more than six-months’ investment horizons. Hence, MENA portfolio managers should not invest in Europe, UK and Emerging Markets indexes. Research limitations/implications - This study focused only on the bivariate correlation analysis without taking into consideration multivariate relationships. Future research should use multiple wavelet coherence and explore S&PShariahindexes. Practical implications - This work is important for investors searching for assets governed by sharia rules, who reject resorting to conventional markets, and policy makers dealing with coordination costs. They would be able to formulate strategies based on the different indexes’ relationships. Originality/value - This paper enriches the limited stream of literature focusing only on Islamic indexes. Due to the important development of Islamic Finance in each MENA country, the authors shed the light on this Region’s index.

Keywords: VECM; Co-movement; Wavelet coherence; Diversification opportunities; MENA Islamic index; Multivariate GARCH DCC (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eme:imefmp:imefm-04-2018-0137

DOI: 10.1108/IMEFM-04-2018-0137

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