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Dynamic correlations and volatility linkages between stocks and sukuk : Evidence from international markets
Author(s) -
Sclip Alex,
Dreassi Alberto,
Miani Stefano,
Paltrinieri Andrea
Publication year - 2016
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2016.06.005
Subject(s) - sukuk , bond , volatility (finance) , equity (law) , economics , diversification (marketing strategy) , financial economics , financial crisis , asset allocation , portfolio , business , monetary economics , finance , islam , islamic finance , philosophy , theology , marketing , political science , law , macroeconomics
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.