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Do Portfolio Diversification Opportunities exist across the Euro Zone Islamic Equity Markets? MGARCH-DCC and Wavelet Correlation Analysis

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  • Ilhan, Bilal
  • Masih, Mansur

Abstract

The economic process that Euro Zone countries have gone through created contradictory claims about whether those particular financial markets have converged, which has implications for the portfolio diversification issue for the investors and policy makers alike. Thus, this paper aims to examine whether there are opportunities for creating optimally diversified portfolios from the perspectives of the Islamic investors which is a missing point in the existing literature for the above-mentioned markets. The focus of the study is the correlations among the selected Shariah Indices‟ daily returns covering the period from April 2008 to March 2014, to illustrate not only the static picture, but the dynamic comovements which can be tested through the recent econometric methodologies (M-GARCH/DCC, MODWT, and CWT/WTC). Hence, the unique contribution of this research is the enhancement of the existing literature by empirically testing the „time-varying‟ and „scale dependent‟ volatilities and correlations of the particular markets by relying on the Shariah (Islamic) indices. By incorporating scale dependence, the paper is able to identify unique portfolio diversification opportunities for different set of investors bearing different investment horizons/holding periods of stock (e.g. weekly, monthly, quarterly, etc.) The overall result driven is that since there appears to be only continuous portfolio diversification opportunities between the French and Danish Islamic equity markets for up to six-month investment holding periods, in general, the possibility of portfolio diversification benefits for the short-, medium- and long-run does not seem to be available among these markets. This result implies that the Euro Zone financial markets are highly correlated/converged yielding minimal portfolio diversification benefits for all the heterogeneous investment horizons.

Suggested Citation

  • Ilhan, Bilal & Masih, Mansur, 2014. "Do Portfolio Diversification Opportunities exist across the Euro Zone Islamic Equity Markets? MGARCH-DCC and Wavelet Correlation Analysis," MPRA Paper 57688, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:57688
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    References listed on IDEAS

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    Cited by:

    1. Abu-Alkheil, Ahmad & Khan, Walayet A. & Parikh, Bhavik & Mohanty, Sunil K., 2017. "Dynamic co-integration and portfolio diversification of Islamic and conventional indices: Global evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 66(C), pages 212-224.
    2. Shakir, Zeeniya & Masih, Mansur, 2016. "How is the European debt crisis affecting islamic equity? challenges in portfolio diversification within the eurozone: A markov switching and continuous wavelet transform analysis," MPRA Paper 71683, University Library of Munich, Germany.

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    More about this item

    Keywords

    International Portfolio Diversification; Euro Zone Islamic Stock Market Investments; M-GARCH/DCC; Wavelet analysis; CWT; MODWT;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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