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

Andrea Paltrinieri, A. Sclip, A. Dreassi, S. Miani

Risultato della ricerca: Contributo in rivistaArticolo in rivista

20 Citazioni (Scopus)

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.
Lingua originaleEnglish
pagine (da-a)34-44
Numero di pagine11
RivistaReview of Financial Economics
DOI
Stato di pubblicazionePubblicato - 2016

Keywords

  • Asset allocation
  • DCC GARCH
  • Volatility linkages
  • Sukuk
  • Dynamic correlations

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