Diversification benefits of commodity indices versus Islamic stock indices

Abstract

The objective of this study is to investigate conditional correlations between the Dow Jones Emerging Market index and commodity indices (i.e., agriculture, energy, industrial metals, livestock, precious metals) and Islamic stock indices (i.e., JKII, KLFTEMSI, MSCI Bahrain, MSCI Kuwait, and MSCI Qatar). Additionally, this paper classifies the properties of assets whether it is a diversifier, a hedger, or a safe-haven assets to the Dow Jones Emerging Market index. The estimation method is the dynamic conditional correlation generalized autoregressive conditional heteroskedasticity (DCC-GARCH) model to estimate the conditional correlations during the period of 2007-2021 which covers the Global financial crisis (GFC) and Covid-19 pandemic. The finding indicates that all commodity and Islamic stock indices serve as a diversifier in general. However, MSCI Bahrain, MSCI Kuwait, and precious metals act as a safe-haven asset during certain periods of the GFC and Covid-19 crises. Interestingly, KLFTEMSI and JKII present the highest hedging effectiveness over the study period.