Dynamic connectedness, spillover, and optimal hedging strategy among FinTech, Sukuk, and Islamic equity markets

Abstract

The paper investigates the dynamic connectedness, spillover, and optimal hedging strategy of the FinTech, Sukuk, and Islamic equity markets. The CAViaR approach, TVP-VAR Frequency connectedness, and network connectedness approaches are used. We also apply the MVP, MCP, and MCoP approaches to construct portfolios based on the Fintech, Sukuk, and Islamic equity indices. We then compute hedge effectiveness, portfolio performance, and Sharpe ratios. We find that FinTech markets are predominantly intra-connected in the short and medium term; they are significantly interconnected in the long term. In terms of frequency decomposition, volatility transmission among the variables dominates in the short term in comparison with other examined durations. The Russian-Ukrainian War and COVID-19 pandemic both saw a considerable increase in the intensity of volatility transmission. There is higher information transmission from Islamic equity indices and less effective information transmission from Sukuk and Fintech indices. Our findings suggest that the dynamic portfolio weights for MCP and MCoP seem to be similar, but clearly differs from MVP approach. When delving into the existence of Fintech indices as a part of an international fixed-income Islamic investor's portfolio, our paper's findings – being robust to the portfolio construction method – establish that Fintech indices do have a notable role in fixed-income Islamic investment portfolios. Finally, we conclude by highlighting the fact that the benefits of diversifying a portfolio with FinTech and Islamic assets fluctuate with time and on a regular basis.