Should Shariah-compliant investors include commodities in their portfolios? New evidence

Nagayev, Ruslan and Masih, Mansur (2013): Should Shariah-compliant investors include commodities in their portfolios? New evidence.

Abstract

This paper investigates the links between price returns for seven commodities and Shariah-compliant equities (developed and emerging markets) over the period from January 1996 to April 2013. Employing the dynamic conditional correlation (DCC) M-GARCH methodology, we show that the correlations between commodity and stock markets evolve over time and are highly volatile, particularly during the financial crisis, which has played a key role, emphasizing the increased integration between commodity and stock markets, and underlining the financialization of commodity markets. However, in the last couple of years the correlation between commodities and equities seems to be decaying. Hence, Islamic investors hopefully could gain from the diversification benefits by the inclusion of commodities into their portfolios.

• Item Type: MPRA Paper
• Language: English
• Keywords: financialization of commodities, shariah-compliant equities, MGARCH – DCC technique
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q1 - Agriculture > Q14 - Agricultural Finance

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