An understanding of volatility and co-movements in financial markets is important for portfolio allocation and risk management practices. The current financial crisis caused a shrinkage in values of most assets, an increased volatility and a threat to the survival of several institutional investors. Managing risks and returns within the classic portfolio theory, when correlations across securities soar, is increasingly challenging. In this paper, we investigate the volatility behavior and the co-movements between sukuk and international stock indexes. Symmetric multivariate GARCH models with dynamic conditional correlations (DCC) were estimated under Student-t distribution. We provide evidence of high correlations between sukuk and US and EU stock markets, without finding the well-known flight to quality behavior affecting Islamic bonds. We also show that volatility linkages between sukuk and regional market indexes are higher during financial crisis. We argue that investors could obtain diversification benefits including sukuk in a well-diversified equity portfolio, given their lower volatility compared to equity. But higher volatility linkages and dynamic correlations during financial crises show that they are hybrid instruments between bonds and equity. Our findings are relevant for institutional investors and asset managers that include Islamic bonds in a diversified portfolio.

Sclip, A., Dreassi, A., Miani, S., Paltrinieri, A., Dynamic correlations and volatility linkages between stocks and sukuk: Evidence from international markets, <<REVIEW OF FINANCIAL ECONOMICS>>, 2016; (31): 34-44. [doi:10.1016/j.rfe.2016.06.005] [http://hdl.handle.net/10807/177729]

Dynamic correlations and volatility linkages between stocks and sukuk: Evidence from international markets

Paltrinieri, Andrea
Writing – Review & Editing
2016

Abstract

An understanding of volatility and co-movements in financial markets is important for portfolio allocation and risk management practices. The current financial crisis caused a shrinkage in values of most assets, an increased volatility and a threat to the survival of several institutional investors. Managing risks and returns within the classic portfolio theory, when correlations across securities soar, is increasingly challenging. In this paper, we investigate the volatility behavior and the co-movements between sukuk and international stock indexes. Symmetric multivariate GARCH models with dynamic conditional correlations (DCC) were estimated under Student-t distribution. We provide evidence of high correlations between sukuk and US and EU stock markets, without finding the well-known flight to quality behavior affecting Islamic bonds. We also show that volatility linkages between sukuk and regional market indexes are higher during financial crisis. We argue that investors could obtain diversification benefits including sukuk in a well-diversified equity portfolio, given their lower volatility compared to equity. But higher volatility linkages and dynamic correlations during financial crises show that they are hybrid instruments between bonds and equity. Our findings are relevant for institutional investors and asset managers that include Islamic bonds in a diversified portfolio.
2016
Inglese
Sclip, A., Dreassi, A., Miani, S., Paltrinieri, A., Dynamic correlations and volatility linkages between stocks and sukuk: Evidence from international markets, <<REVIEW OF FINANCIAL ECONOMICS>>, 2016; (31): 34-44. [doi:10.1016/j.rfe.2016.06.005] [http://hdl.handle.net/10807/177729]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10807/177729
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