Global risk exposures and industry diversification with Shariah-compliant equity sectors

摘要

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