Investing Amid Turmoil: Diversification Opportunities in Islamic Stock Indices, Bitcoin, Gold, and Crude Oil

Abstract

This study investigates diversification potential in the Malaysian and United States (US) Islamic stock indices, Bitcoin, gold, and crude oil prices, particularly amidst economic crises. It uses wavelet coherence and MGARCH-DCC on a dataset spanning 2014 to 2022. The findings revealed that there are diversification potentials for investors. The dynamic conditional correlation (DCC) analysis indicated that the correlation of gold with both indices is generally low, except for a brief period of heightened correlation during the COVID-19 pandemic in 2020. The correlations between bitcoin and Islamic Stock Index Returns (ISIR) of the US and Malaysia respectively are generally weak across the study period except during the pandemic for the US. Hence, it is prudent for investors with exposure to the countries’ stock index to incorporate gold within their portfolio to harness diversification benefits. The results further suggested that Bitcoin is also an appealing option for portfolio diversification. Our findings further revealed that during the Russia-Ukraine conflict, crude oil had demonstrated a minimal correlation with both the US and Malaysia ISIR, providing an opportunity for diversification. The results further suggested that Islamic equities can be a buffer against risk and instability, especially during turmoil, offering crucial implications for Shari’ah-compliant investors in Malaysia and the US. The study points to the need for further investigations incorporating additional economic shocks to understand diversification opportunities across varying investment horizons and holding durations.