Unveiling the diversification benefits of Islamic equities and commodities: evidence from multivariate-GARCH and continuous wavelet analysis

Abstract

Purpose: This study examines the extent to which the Indonesian Shariah compliant investors can benefits from the portfolio diversification with the Islamic indices of its trading partners and selected commodities such as gold, crude oil, and cocoa. Methodology: We use daily time series data covering both Islamic and commodity indices starting from 4 June 2007 until 30 December 2016 by application of Multivariate –GARCH and Continuous Wavelet Analysis. Findings: Our findings tend to indicate that investors with an exposure in Shariah compliant indices of Indonesia and wanting to gain more diversification benefits should invest either in USA or India Islamic equity. Instead, the greater benefits will be obtained by Shariah compliant investors if they invest in USA Islamic indices during long-term investment horizons. If investors want to invest in medium investment horizons, investing in India Islamic equity is a viable option. The findings further suggest that gold has a role of diversification benefits as a “safe haven” instrument for investors. It is advisable for the investors that have exposure in commodities (gold, crude oil, and cocoa) and want to invest in Indonesian Islamic equity, they should hold the portfolio for not more than 16 days to gain diversification benefits. Originality/Value: The results of this study are expected to have crucial implications for the Indonesia Shariah compliant investors and portfolio managers because it helping them to understand portfolio diversification benefits with different stock holding periods or investment horizons.