Abstract
With the steady growth in the data set on the COVID-19 pandemic, empirical works that employ novel and yet appropriate statistical techniques to corroborate previous findings of the pandemic and its consequences on financial markets are necessary. This paper examined the impact of COVID-19 information flow on the Islamic and conventional equities within the short-, mid-, and long-term horizons to assess possible diversification prospects in the era of the pandemic. To the studied equities markets, a novel technique based on a denoised frequency-domain entropy paradigm was applied. The operability of entrenched market dynamics in the long-term horizon of the COVID-19 pandemic period is reinforced by the results. The findings divulge diversification opportunities between Islamic and conventional equities in the short- and mid-term periods of the COVID-19 pandemic. The risks on equities from Japan or Bahrain could be diversified by equities from Jordan in the short-term, while in the intermediate-term stocks from Japan could diversify with the UAE and USA equities. The results imply that it is imperative for investors and fund managers to employ portfolio management techniques that show how to use benefits together with risk prevention and management across distinct time scales.
Highlights
Islamic stock markets grew at a phenomenal rate during both times. e recent COVID-19 pandemic cannot be sidelined when the discourse about financial market turmoil is at play. e pandemic, which has led financial markets to record-breaking losses [4], has driven several studies in the area of cryptocurrencies [5, 6], prices of staple foods [7], global equities [8], among others
Achieving optimal returns through adequate diversification necessitates a thorough understanding of the risk and return characteristics of various assets in a portfolio, as well as their connectedness and response to market information. e search for reliable assets that may shield investors in these unstable market periods is increased due to the increased information flow to financial markets in crises periods. is is what Owusu Junior et al [8] terms as the competitive market hypothesis (CMH). e search for safety nets during these times is what triggers financialisation [9], which results in the introduction of new assets and/or asset classes like cryptocurrencies, faith-based financial instruments, Islamic assets, and so forth
Notwithstanding, the prevailing crisis in global financial markets, which is championed by the COVID-19 pandemic, has impacted conventional markets; Islamic financial markets’ (IFMs) have had their “fair” share [14] to the extent that recognised rating agencies like S&P projected that the IFM would decline in growth in 2020, followed by a slight rebound in 2021 [15]
Summary
Is paper examined the impact of COVID-19 information flow on the Islamic and conventional equities within the short-, mid-, and long-term horizons to assess possible diversification prospects in the era of the pandemic. Is warrants that where data is available to a usable extent, studies that investigate the index-specific response to a significant event like the COVID-19 pandemic are not out of play From this backcloth, this study addresses three questions: (i) Are there differences in the way Islamic and conventional equities respond to information flow from COVID-19? E study finds that the long term presents different dynamics where the majority of the ETEs are insignificantly positive, suggesting that Islamic and conventional markets are almost saturated with COVID-19 information flow.
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