From dotcom to Covid-19: A convergence analysis of Islamic investments

Alexakis, Christos; Kenourgios, Dimitris; Pappas, Vasileios; Petropoulou, Athina

Abstract

This paper goes beyond the extant comparisons of Islamic and conventional investments by econometrically assessing their convergence dynamics, in a dataset spanning over 1996-2020, covering ten business sectors and five episodes of crisis. We use a dynamic multivariate framework to estimate time-varying correlations, which we submit to beta and sigma-convergence analysis. Subsequently we examine how convergence dynamics affect portfolio risk management and crisis propagation. Our results show strong convergence of Islamic and conventional investments. During crises conventional convergence rates double, but Islamic ones are less affected. Sectoral diversification works best for conventional investments; Islamic ones behave as a single entity. On average we document a 7% risk diversification benefit from Islamic investments, at a 64 basis points cost. Yet, at the epicentre of the Covid-19 financial crisis this rises to 466 basis points and highlights the resilience of these investments in an exogenous event. Islamic investments reduce volatility spillovers in the financial system, but they are progressively less insulated across time. Our findings withstand a battery of robustness checks and are primarily useful to policy makers and investors.

Citation

Alexakis, C., Kenourgios, D., Pappas, V., & Petropoulou, A. (2021). From dotcom to Covid-19: A convergence analysis of Islamic investments. Journal of International Financial Markets, Institutions and Money, 75, Article 101423. https://doi.org/10.1016/j.intfin.2021.101423

• Journal Article Type: Article
• Acceptance Date: Sep 8, 2021
• Online Publication Date: Sep 13, 2021
• Publication Date: Nov 1, 2021
• Deposit Date: Sep 17, 2021
• Publicly Available Date: Sep 17, 2021
• Journal: Journal of International Financial Markets, Institutions and Money
• Print ISSN: 1042-4431
• Electronic ISSN: 1873-0612
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 75
• Article Number: 101423
• DOI: https://doi.org/10.1016/j.intfin.2021.101423
• Keywords: Convergence; Contagion; Crisis; Difference-in-difference; Dynamic correlation; Economy sectors; Islamic finance; Portfolio
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S1042443121001372?via%3Dihub