Are Islamic bonds a good safe haven for stocks? Implications for portfolio management in a time-varying regime-switching copula framework. Issue 3 (14th January 2019)

• Record Type: Journal Article
• Authors: Shahzad, Syed Jawad Hussain; Aloui, Chaker; Jammazi, Rania; Shahbaz, Muhammad
• Is Part Of: Applied economics. Volume 51:Issue 3(2019)
• Page Start: 219
• Page End: 238
• Publication Date: 2019-01-14
• Subjects: Stocks -- Islamic bonds -- copula -- structural breaks -- switching regime models; G11 -- G15; Economics -- Periodicals; 330
• DOI: 10.1080/00036846.2018.1494376
• Languages: English
• ISSNs: 0003-6846

Abstract

ABSTRACT: We examine the portfolio implications of adding the Islamic bond index (Sukuk) to a benchmark portfolio of Islamic stocks. The daily data of the Islamic bond index; the Islamic stock markets of the world, Canada, Japan, USA, UK and Islamic financial stocks are used for the period of 1 October 2005 through 30 April 2015. We examine the presence of structural breaks via the Iterated Cumulative Sum of Square (ICSS) algorithm, which clearly indicate that Islamic stock-bond returns have several structural breaks over the sample period; hence, the dependence among the markets may have a regime-switching pattern. We rely on the flexible properties of the ARMA-FIGARCH models with the skew-t distribution to model the marginal distributions of the series. Next, a set of static, time-varying and regime-switching time-varying copula models are applied to encircle the dependence dynamics. Finally, using different portfolio strategies, we access the portfolio implications of a multi-asset portfolio. Overall, the results provide evidence that the Islamic bond index can be included as a potential hedge/safe haven in benchmark stock portfolios.