Which Sectoral CDS Can More Effectively Hedge Conventional and Islamic Dow Jones Indices? Evidence from the COVID-19 Outbreak and Bubble Crypto Currency Periods

Rania Zghal, Fredj Amine Dammak, Semia Souai, Nejib Hachicha and Ahmed Ghorbel ()
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Rania Zghal: Faculty of Economics and Management of Sfax, University of Sfax, Airport Road Km 4, Sfax 30188, Tunisia
Fredj Amine Dammak: Jules Verne, IUT Oise, University of Picardie, 80000 Amiens, France
Semia Souai: Faculty of Economics and Management of Sfax, University of Sfax, Airport Road Km 4, Sfax 30188, Tunisia
Nejib Hachicha: Faculty of Economics and Management of Sfax, University of Sfax, Airport Road Km 4, Sfax 30188, Tunisia
Ahmed Ghorbel: Faculty of Economics and Management of Sfax, University of Sfax, Airport Road Km 4, Sfax 30188, Tunisia

Risks, 2025, vol. 13, issue 10, 1-33

Abstract: In this study, we aim to provide a comprehensive analysis of the risk management potential of sectoral Credit Default Swaps (CDSs) within financial portfolios. Our objectives are threefold: (i) to investigate the safe haven properties of sectoral CDSs; (ii) to assess their hedging effectiveness and evaluate the diversification benefits of incorporating sectoral CDSs into both conventional and Islamic stock market portfolios; and (iii) to compare these findings with those obtained from alternative assets such as the VSTOXX, gold, and Bitcoin indices. To achieve this, we estimate time-varying hedge ratios using a range of multivariate GARCH (MGARCH) models and subsequently compute hedging effectiveness metrics. Conditional correlations derived from the Asymmetric Dynamic Conditional Correlation (ADCC) model are employed in linear regression analyses to assess safe haven characteristics. This methodology is applied across different subperiods to capture the impact of the crypto currency bubble and the COVID-19 pandemic on hedging performance.

Keywords: sectoral CDS; Dow Jones conventional and Islamic emerging market indices; MGARCH models; safe haven; hedging; conditional diversification benefits (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2025
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