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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Fredj Amine Dammak: LEFMI - Laboratoire d’Économie, Finance, Management et Innovation - UR UPJV 4286 - UPJV - Université de Picardie Jules Verne
Nejib Hachicha: Faculté des Sciences économiques et de Gestion - USSGB - Université des sciences sociales et de gestion de Bamako
Ahmed Ghorbel: IETR - Institut d'Électronique et des Technologies du numéRique - UR - Université de Rennes - INSA Rennes - Institut National des Sciences Appliquées - Rennes - INSA - Institut National des Sciences Appliquées - CentraleSupélec - CNRS - Centre National de la Recherche Scientifique - Nantes Univ - EPUN - Nantes Université - Ecole Polytechnique de l'Université de Nantes - Nantes Université - pôle Sciences et technologie - Nantes Univ - Nantes Université

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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: conditional diversification benefits; hedging; safe haven; MGARCH models; Dow Jones conventional and Islamic emerging market indices; sectoral CDS (search for similar items in EconPapers)
Date: 2025-09-28
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Published in Risks, 2025, 13 (10), pp.187. ⟨10.3390/risks13100187⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05291419

DOI: 10.3390/risks13100187

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