Diversification benefits in energy, metal and agricultural commodities for Islamic investors: evidence from multivariate GARCH approach

Buerhan Saiti; Abdulnasir Dahiru; Ibrahim Guran Yumusak; Buerhan Saiti; Abdulnasir Dahiru; Ibrahim Guran Yumusak

doi:10.3934/QFE.2018.3.733

Quantitative Finance and Economics

2018, Volume 2, Issue 3: 733-756. doi: 10.3934/QFE.2018.3.733

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Research article

Diversification benefits in energy, metal and agricultural commodities for Islamic investors: evidence from multivariate GARCH approach

1.
Faculty of Business and Management Sciences, Istanbul Sabahattin Zaim University, Istanbul, Turkey
2.
Institute of Islamic Banking and Finance, International Islamic University Malaysia, Kuala Lumpur, Malaysia

Received: 18 April 2018 Accepted: 20 August 2018 Published: 04 September 2018
JEL Codes: G11, Q02, C58

The purpose of this paper is to analyze the portfolio diversification opportunities offered by certain commodities to Islamic equity investors by investigating the volatility and correlations of Islamic equity index returns and those commodities. This paper attempts to add value to the existing literature by empirically testing the "time-varying" volatilities and correlations of agricultural, metal and energy commodities using Morgan Stanley Capital International (MSCI) World Islamic Index. The daily data for a time period of nine and a half years, from the inception of MSCI World Islamic Index on 1^st of July 2007 to January 2017, were collected for this research and analyzed using MGARCH-DCC approach. The findings tend to suggest that: i) the agricultural commodities provide better diversification benefits compared to metal and energy commodities; ii) the Global financial crisis has a significant negative impact on the integration of the indices; and iii) natural gas, gold, wheat, sugar, coffee and corn in general have relatively low correlation, in comparison to the rest of the commodities. As implication of the study, the medium-to-long term investors could gain a better diversification benefit in most of these commodities during all the market periods.
- MGARCH-DCC,
- Islamic investment,
- Islamic finance,
- commodities,
- diversification
Citation: Buerhan Saiti, Abdulnasir Dahiru, Ibrahim Guran Yumusak. Diversification benefits in energy, metal and agricultural commodities for Islamic investors: evidence from multivariate GARCH approach[J]. Quantitative Finance and Economics, 2018, 2(3): 733-756. doi: 10.3934/QFE.2018.3.733

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Abstract

The purpose of this paper is to analyze the portfolio diversification opportunities offered by certain commodities to Islamic equity investors by investigating the volatility and correlations of Islamic equity index returns and those commodities. This paper attempts to add value to the existing literature by empirically testing the "time-varying" volatilities and correlations of agricultural, metal and energy commodities using Morgan Stanley Capital International (MSCI) World Islamic Index. The daily data for a time period of nine and a half years, from the inception of MSCI World Islamic Index on 1^st of July 2007 to January 2017, were collected for this research and analyzed using MGARCH-DCC approach. The findings tend to suggest that: i) the agricultural commodities provide better diversification benefits compared to metal and energy commodities; ii) the Global financial crisis has a significant negative impact on the integration of the indices; and iii) natural gas, gold, wheat, sugar, coffee and corn in general have relatively low correlation, in comparison to the rest of the commodities. As implication of the study, the medium-to-long term investors could gain a better diversification benefit in most of these commodities during all the market periods.

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