Further evidence on international Islamic and conventional portfolios diversification under regime switching |
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Authors: | Slah Bahloul Mourad Mroua Nader Naifar |
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Affiliation: | 1. Department of Management, University of Sfax, Higher School of Business Administration, Sfax, Tunisia;2. Department of Management, University of Sfax, Institute of High Business Studies, Sfax, Tunisia;3. Department of Finance and Investment, College of Economics and Administrative Sciences, Al Imam Mohammad Ibn Saud Islamic University (IMSIU), Riyadh, Saudi Arabia |
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Abstract: | This article investigates the comparative performance of International Islamic and conventional portfolio diversification across different financial market regimes and provides an optimal choice from an American investor’s viewpoint during the period 2002–2014. Using a bootstrap-based stochastic dominance (SD) test and monthly MSCI prices of Islamic stock market indices and their conventional counterparts in 38 countries from North and Latin America, Europe and Asia-Pacific regions, we find that SD relationships between Islamic and conventional optimal-diversified portfolios change systematically according to investment region and market regime. Essentially, for all regimes, US investors are indifferent between Islamic diversification and its conventional counterpart, which implies that arbitrage diversification opportunities are rare and short lived in all regions. However, across all regions, especially in a crisis regime, Islamic portfolio diversification can be a good substitute for conventional diversification. Islamic portfolio diversification in North and Latin America, Europe and Global regions is an optimal choice for the risk-averse American investors. Finally, results imply that portfolio diversification among Islamic market indices can be a good hedge, offering investors superior investment alternatives during any financial meltdown or economic slowdown due to the conservative nature of Sharia-compliant investments. |
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Keywords: | International diversification Islamic market index regime switching stochastic dominance approach |
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