Potential diversification benefits: A comparative study of Islamic and conventional stock market indexes

Abstract

The study aims to contribute to the better understanding of potential diversification benefits for US and its major trading partners, namely Canada, Japan, and the UK, across both Islamic and conventional indexes. We applied a Dynamic Conditional Correlations (DCC) model to examine the dynamic correlation and volatility of returns during 2001–2017. The findings put in evidence that, unlike Canadian peers, Japanese indexes exhibit a low dynamic correlation with US indexes, which ultimately suggests diversification opportunities for US-based investors. Understanding volatilities and correlations patterns through international markets would help investors, policymakers, and market participants to take informed decisions, mitigate risks, and anticipate potential spillover effects.