Financial fusion: Bridging Islamic and Green investments in the European stock market

Abstract

Given the historic decoupling nature of Islamic and green financial instruments with conventional financial markets this study investigated the interconnectedness of the European financial market with green and Islamic financial instruments amidst the unprecedented global dynamics and mounting uncertainties. Considering data from January 02, 2015, to October 03, 2023 and using TVP-VAR and Wavelet Coherence, our empirical findings challenge conventional assumptions about the behaviour of Islamic and green financial instruments in times of economic distress. While traditional financial instruments may falter, both Islamic and green financial instruments emerge as resilient options during market crises as indicated using quantile TVP-VAR as robustness measure. Both Islamic and Green bonds display remarkable potential for stability and resilience for European investors. For investors navigating the complexities of financial markets, especially during economic distress, our findings offer valuable guidance. Incorporating Islamic and green financial instruments, alongside diversified bond portfolios, emerges as a robust strategy. We strongly advocate the inclusion of both sukuk and green bonds in investment portfolios. Our result research also holds significant implications for policymakers.