Exploring portfolio diversification opportunities in Islamic capital markets through bitcoin: evidence from MGARCH-DCC and Wavelet approaches

Lim, Siok Jin and Masih, Mansur (2017): Exploring portfolio diversification opportunities in Islamic capital markets through bitcoin: evidence from MGARCH-DCC and Wavelet approaches.

Abstract

Bitcoin is a form of digital currency that is circulating without the backing of any central bank and monitoring authority. Therefore, sceptics regularly question the status of Bitcoin as a legal tender. Nevertheless, due to increasing popularity and importance of Bitcoin, practitioners and researchers have recently started to assess Bitcoin from the perspective of business, economics and finance. This paper explores possibilities of using Bitcoin as a portfolio optimisation strategy for Islamic fund managers. We use three recent and appropriate methodologies: M-GARCH-DCC, Continuous Wavelet Transforms (CWT), and Maximum Overlap Discrete Wavelet Transform (MODWT). The results significantly tend to indicate that Bitcoin and Shari’ah stock indices are lowly and negatively correlated, suggesting that Islamic stock investors can benefit from diversification with Bitcoin and that the fundamentals of such crypto-currencies can be further investigated for the benefit of Islamic capital markets.

• Item Type: MPRA Paper
• Language: English
• Keywords: Islamic stocks, Bitcoin, portfolio diversification, MGARCH-DCC, Wavelets
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

References

Aguiar-Conraria, L., & Soares, M. J. (2011). Oil and the macroeconomy: using wavelets to analyze old issues. Empirical Economics, 40(3), 645-655.

Arash, M. and Alloway, T. (2017) Bitcoin ETF Plan Struggles to Find Support. The Financial Times, 10 May.

Ariff, M., & Rosly, S. A. (2011). Islamic banking in Malaysia: unchartered waters. Asian Economic Policy Review, 6(2), 301-319.

Arthur, C. (2017) Bitcoin: Man Charged over Alleged Multimillion-Dollar Ponzi Fraud. The Guardian, 10 May.

Balchunas, E. (2013) Diamonds and Kazakhs and Bitcoins, Oh My: An ETF Parade. Bloomberg, 12 July.

Balcilar, M., Bouri, E., Gupta, R., & Roubaud, D. (2016). Can Volume Predict Bitcoin Returns and Volatility? A Nonparametric Causality-in-Quantiles Approach, REPEC Working paper no. 201662.

Bouoiyour, J., & Selmi, R. (2015). What Does Bitcoin Look Like?. Annals of Economics and Finance, 16(2), 449-492.

Bouoiyour, J., Selmi, R., & Tiwari, A. K. (2015). Is Bitcoin business income or speculative foolery? New ideas through an improved frequency domain analysis. Annals of Financial Economics, 10(1), June.

Bouri, E., Gupta, R., Tiwari, A. K., & Roubaud, D. (2017). Does Bitcoin hedge global uncertainty? Evidence from wavelet-based quantile-in-quantile regressions. Finance Research Letters, February, 1-9.

Bouri, E., Jalkh, N., Molnár, P., & Roubaud, D. (2017). Bitcoin for energy commodities before and after the December 2013 crash: diversifier, hedge or safe haven?. Applied Economics, March, 1-11.

Bouri, E., Molnár, P., Azzi, G., Roubaud, D., & Hagfors, L. I. (2017). On the hedge and safe haven properties of Bitcoin: Is it really more than a diversifier?. Finance Research Letters, 20, 192-198.

Bouri, E., Molnár, P., Azzi, G., Roubaud, D., & Hagfors, L. I. (2017). On the hedge and safe haven properties of Bitcoin: Is it really more than a diversifier?. Finance Research Letters, 20, 192-198.

Brandvold, M., Molnár, P., Vagstad, K., & Valstad, O. C. A. (2015). Price discovery on Bitcoin exchanges. Journal of International Financial Markets, Institutions and Money, 36, 18-35.

Brière, M., Oosterlinck, K., & Szafarz, A. (2015). Virtual currency, tangible return: Portfolio diversification with bitcoin. Journal of Asset Management, 16(6), 365-373.

Ciaian, P., Rajcaniova, M., & Kancs, D. A. (2016). The economics of BitCoin price formation. Applied Economics, 48(19), 1799-1815.

Ciaian, P., Rajcaniova, M., & Kancs, D. A. (2016). The economics of BitCoin price formation. Applied Economics, 48(19), 1799-1815.

Dwyer, G. P. (2015). The economics of Bitcoin and similar private digital currencies. Journal of Financial Stability, 17, 81-91.

Dyhrberg, A. H. (2016). Hedging capabilities of bitcoin. Is it the virtual gold?. Finance Research Letters, 16, 139-144.

Eisl, A., Gasser, S. M., & Weinmayer, K. (2015). Caveat Emptor: Does Bitcoin Improve Portfolio Diversification? SSRN - id 2408997.

Evans, C. (2015). Bitcoin in Islamic Banking and Finance. Journal of Islamic Banking and Finance, 3(1), 1-11.

Gandal, N., & Halaburda, H. (2014). Competition in the Cryptocurrency Market, Bank of Canada Working paper 2014 -33.

Gençay, R., Selçuk, F., & Whitcher, B. (2002). An introduction to wavelets and other filtering methods in finance and economics. Waves in Random Media, 12(3), 399-399.

Gjika, D., & Horvath, R. (2013). Stock market comovements in Central Europe: Evidence from the asymmetric DCC model. Economic Modelling, 33, 55-64.

Grinsted, A., Moore, J. C., & Jevrejeva, S. (2004). Application of the cross wavelet transform and wavelet coherence to geophysical time series. Nonlinear processes in geophysics, 11(5/6), 561-566.

Jaffar, Y., Dewandaru, G., & Masih, M. (in press, 2017). Exploring portfolio diversification opportunities through venture capital financing: Evidence from MGARCH-DCC, Markov Switching and Wavelet approaches, Emerging Markets Finance and Trade.

Kearney, C., & Potì, V. (2006). Correlation dynamics in European equity markets. Research in International Business and Finance, 20(3), 305-321.

Kristoufek, L. (2013). BitCoin meets Google Trends and Wikipedia: Quantifying the relationship between phenomena of the Internet era. Scientific reports, 3, 3415.

Kristoufek, L. (2015). What are the main drivers of the Bitcoin price? Evidence from wavelet coherence analysis. PloS one, 10(4), e0123923.

Najeeb, S. F., Bacha, O., & Masih, M. (2015). Does heterogeneity in investment horizons affect portfolio diversification? Some insights using M-GARCH-DCC and wavelet correlation analysis. Emerging Markets Finance and Trade, 51(1), 188-208.

Paramati, S. R., Gupta, R., & Roca, E. (2015). Stock market interdependence between Australia and its trading partners: does trade intensity matter?. Applied Economics, 47 (49), 5303-5319.

Rahim, A. M., & Masih, M. (2016). Portfolio diversification benefits of Islamic investors with their major trading partners: Evidence from Malaysia based on MGARCH-DCC and wavelet approaches. Economic Modelling, 54, 425-438.

Ramsey, J. B., & Lampart, C. (1998). Decomposition of economic relationships by timescale using wavelets. Macroeconomic dynamics, 2(01), 49-71.

Rogojanu, A., & Badea, L. (2014). The issue of competing currencies. Case study–Bitcoin. Theoretical and Applied Economics, 21(1), 103-114.

Weber, B. (2016). Bitcoin and the legitimacy crisis of money. Cambridge Journal of Economics, 40(1), 1 – 41.

Yermack, D. (2013). Is Bitcoin a real currency? An economic appraisal , National Bureau of Economic Research, No. W 19747.