Abstract:
This paper examines the risk exposures of ten major Islamic sector indexeswith respect to shocks
in global conventional markets. Utilizing a dynamic three-regime, three-factor risk spillover
model, we generally observe positive risk exposures of Islamic equity sectors with respect to
developed market shocks. Consumer Services, Oil & Gas and Technology, however, are found to
exhibit negative risk exposures during crash periods, implying possible safe haven benefits for
global investors. Both in- and out-of-sample results suggest that the portfolios supplemented
with positions in Islamic equity sectors yield much improved risk adjusted returns, implying significant
international diversification benefits. Financials, Healthcare, Telecommunication, and
Utilities particularly stand out with relatively higher weights allocated in the optimal portfolios,
implying the significance of these Islamic sectors in global diversification strategies.
