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Do islamic indices help portfolio diversification ? application of multivariate GARCH and wavelet coherence

Mukrim, Syahirah and Masih, Mansur (2018): Do islamic indices help portfolio diversification ? application of multivariate GARCH and wavelet coherence.

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Abstract

The global financial crises have made investors rethink their strategies of diversifying their portfolios by allocating their assets/capitals into Islamic equities. The feature of investment based on real assets by the Islamic equity market has made the market more stable during financial turmoil and was seen as investment alternatives. This paper is a study on the performance of Islamic equity indices against that of the conventional indices counterparts on a risk-adjusted return basis and to explore on the opportunities for investors to diversify their portfolio using Islamic equities. The result shows that Islamic equity market index (Dow Jones Islamic) has lower risk as compared to their conventional counterpart of Dow Jones Global and lower return as compared to the benchmarked portfolio (MSCI World) based on the result of the alpha and beta. This shows an advantage to investors or fund manager who pursues a passive approach to managing their portfolios and they're not exposed to market timing ability skills. In addition to that, the results also show that investors and fund managers can diversify their portfolios by allocating their assets/funds in Islamic equities due to the low correlation with their conventional counterparts. Policymakers can also take advantage of this to loosen up their restrictions to foreign investment if there is any policy imposing capital control that is being exercised in their country.

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