Is There a Role for Islamic Bonds in Global Diversification Strategies? An Empirical Analysis of Risk Transmissions and Dynamic Correlations

36 Pages Posted: 28 Apr 2015

See all articles by Mehmet Balcilar

Mehmet Balcilar

University of New Haven

Gözde Çerçi

Çukurova University

Riza Demirer

Southern Illinois University Edwardsville - Department of Economics & Finance; Economic Research Forum (ERF)

Date Written: April 27, 2015

Abstract

This paper explores international diversification benefits of Islamic bonds (sukuk) by examining dynamic spillovers and correlations between sukuk and conventional bond and stock markets. Asymmetric volatility spillover effects are observed from global debt and equity markets to Islamic bonds, suggesting that volatility on conventional markets has opposite spillover effects on Islamic bonds. The analysis of dynamic correlations suggests a low degree of association between these securities and global stock markets with episodes of negative correlations observed, particularly during market crisis periods. The low degree of correlation plays a significant role in the performance of these securities as diversifiers for global stock portfolios. We observe that Islamic bonds can provide valuable diversification benefits for conventional stock portfolios that are not possible to obtain from conventional bonds, underscoring the significance of Islamic bonds as a viable alternative to its conventional counterparts.

Keywords: Volatility spillover, Islamic bonds, Dynamic correlations, International Diversification

JEL Classification: C32, G11, G15

Suggested Citation

Balcilar, Mehmet and Çerçi, Gözde and Demirer, Riza, Is There a Role for Islamic Bonds in Global Diversification Strategies? An Empirical Analysis of Risk Transmissions and Dynamic Correlations (April 27, 2015). Available at SSRN: https://ssrn.com/abstract=2599676 or http://dx.doi.org/10.2139/ssrn.2599676

Mehmet Balcilar

University of New Haven ( email )

300 Boston Post Road
West Haven, CT 06516
United States

HOME PAGE: http://www.mbalcilar.net

Gözde Çerçi

Çukurova University ( email )

Saricam ilcesi
Balcali
Adana, 01330
Turkey

Riza Demirer (Contact Author)

Southern Illinois University Edwardsville - Department of Economics & Finance ( email )

Department of Economics & Finance
Alumni Hall 3145
Edwardsville, IL 62026-1102
United States
(618) 650-2939 (Phone)
(618) 650-3047 (Fax)

HOME PAGE: http://www.siue.edu/~rdemire/

Economic Research Forum (ERF) ( email )

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Cairo, Cairo
Egypt

HOME PAGE: http://erf.org.eg/affiliates/riza-demirer-3/

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