BETTER SAFE HAVENS DURING COVID-19: A COMPARISON BETWEEN ISLAMIC AND SELECTED FINANCIAL ASSETS
This study examines the safe haven properties of six assets (the S&P Technology Index, S&P GSCI Commodity Index, bitcoin, the Dow Jones Islamic Equity Index, the Dow Jones Global Sukuk Index and US Treasury bonds) during contiguous infectious diseases, employing the equity index returns of three regional markets (S&P500, S&P Europe, and S&P Asia-Pacific) over the period 2010 - 2020 Q2. In the research, information-rich methodological tools such as the Markov switching approach and the DCC-GARCH model are used. Our results suggest that Sukuk and bonds act as safe havens for different types of investors during the ongoing COVID-19 crisis. This property is, however, is not confirmed for the S&P Technology Index, Commodity Index, bitcoin or the DJ Islamic Equity Index. Moreover, using the time-varying VAR model and the new measure of pandemic uncertainty proposed by Baker et al. (2020), the results demonstrate that the COVID-19 pandemic has led to uncertainty and heightened volatility spillovers among regional equities and the safe haven assets examined. The key results of the study are robust and useful for portfolio managers and investors.
Albulescu, C. T. (2021). COVID-19 and the United States financial markets’ volatility. Finance Research Letters, 38(January 2021), 101699. https://doi.org/10.1016/j.frl.2020.101699.
Altig, D., Baker, S., Barrero J. M., Bloom, N., Bunn, P., & Chen, S. (2020). Economic uncertainty before and during the COVID-19 pandemic. Journal of Public Economics, 191(November 2020), 104274. doi: 10.1016/j.jpubeco.2020.104274.
Antonakakis, N., Chatziantoniou, I. & Gabauer, D. (2019). Cryptocurrency market contagion: Market uncertainty, market complexity, and dynamic portfolios. Journal of International Financial Markets, Institutions and Money, 61(July 2019), 37-51.
Antonakakis, N., Gabauer, D., Gupta, R. & Plakandaras, V. (2018). Dynamic connectedness of uncertainty across developed economies: A time-varying approach. Economics Letters, 166(May 2018), 63-75.
Ashraf, D. (2013). Performance evaluation of Islamic mutual funds relative to conventional funds: Empirical evidence from Saudi Arabia. International Journal of Islamic and Middle Eastern Finance and Management, 6(2), 105-121.
Ashraf, D., Rizwan, M. S., & Ahmad, G. (2020). Islamic equity investments and the COVID-19 pandemic (May 27, 2020). Available at SSRN: http://dx.doi.org/10.2139/ssrn.3611898.
Baker, S. R., Bloom, N., Davis, S. J., Kost, K. J., Sammon, M. C., & Viratyosin, T. (2020). The unprecedented stock market impact of COVID-19. National Bureau of Economic Research Working Paper Series (No. 26945).
Baur, D. G., & Lucey, B. M. (2010). Is gold a hedge or a safe haven? An analysis of stocks, bonds and gold. Financial Review, 45(2), 217-229. https://doi.org/10.1111/j.1540-6288.2010.00244.x.
Baur, D. G., & McDermott, T. K. (2010). Is gold a safe haven? International evidence.Journal of Banking & Finance, 34(8), 1886-1898. https://doi.org/10.1016/j.jbankfin.2009.12.008.
Bhuiyan, R. A., Rahman M. P., Saiti B., & Ghan, G. M. (2018). Financial integration between sukuk and bond indices of emerging markets: Insights from wavelet coherence and multivariate-GARCH analysis. Borsa Istanbul Review, 18(3), 218-
Bouri, E., Cepni, O., Gabauer, D., & Gupta, R. (2020). Return connectedness across asset classes around the COVID-19 outbreak. International Review of Financial Analysis, 73(January 2021), 101646. https://doi.org/10.1016/j.irfa.2020.101646.
Rom, B. M., & Ferguson, K. W. (1993). Post-modern portfolio theory comes of age. The Journal of Investing Winter, 2(4), 27-33. https://doi.org/10.3905/joi.2.4.27.
Chan, K. F., Treepongkaruna, S., Brooks, R., & Gray, S. (2011). Asset market linkages: Evidence from financial, commodity and real estate assets. Journal of Banking & Finance, 35(6), 1415-1426.
Cheema, M. A., Faff, R. W., & Szulczuk, K. (2020). The 2008 global financial crisis and COVID-19 pandemic: How safe are the safe haven assets? Covid Economics, Vetted and Real-Time Papers, (34), 88-115. http://dx.doi.org/10.2139/ssrn.3642945.
Ciaian, P., Rajcaniova, M., & Kancs, D. A. (2016). The economics of BitCoin price formation. Applied Economics, 48(19), 1799-1815.
Conlon, T., & McGee, R. (2020). Safe haven or risky hazard? Bitcoin during the COVID-19 bear market. Finance Research Letters, 35(July 2020), 101607. Constantinides, G. (1986).Capital market equilibrium with transaction costs.Journal of Political Economy, 94(4), 842-62.
Corbet, S., Larkin, C., & Lucey, B. (2020). The contagion effects of the covid-19 pandemic: Evidence from gold and cryptocurrencies. Finance Research Letters, 35(July 2020), 101554.
Diebold, F. X., & Yılmaz, K. (2014). On the network topology of variance decompositions: Measuring the connectedness of financial firms. Journal of Econometrics, 182(1), 119-134.
Engle, R. (2002). Dynamic conditional correlation: A simple class of multivariate generalized autoregressive conditional heteroskedasticity models. Journal of Business & Economic Statistics, 20(3), 339-350.
Faugère, C. (2013). A new characterization of gold as store of wealth across monetary standards and in a global crisis (July 2013). Available at SSRN: http://dx.doi.org/10.2139/ssrn.2299022.
Fleming, J., Kirby, C & Ostdiek, B. (1998). Information and volatility linkages in the stock, bond, and money markets. Journal of Financial Economics, 49(1), 111-137.
Gabauer, D., & Gupta, R. (2018). On the transmission mechanism of country-specific and international economic uncertainty spillovers: Evidence from a TVP-VAR connectedness decomposition approach. Economics Letters, 171(October 2018), 63-71.
Gârleanu, N. & Pedersen, L. H. (2016). Dynamic portfolio choice with frictions. Journal of Economic Theory, 165(September 2016), 487-516.
Goodell, J. W., & Goutte, S. (2021). Co-movement of COVID-19 and Bitcoin: Evidence from wavelet coherence analysis. Finance Research Letters, 38(January 2021), 101625.
Hartmann, P., Straetmans S. & de Vries C. G. (2004). Asset market linkages in crisis periods. Review of Economics and Statistics, 86(1), 313-326.
Heaton, J. & Lucas, D. (1997). Market frictions, savings behavior, and portfolio choice. Macroeconomic Dynamics, 1(1), 76-101.
Huang, X. (2008). Portfolio selection with a new definition of risk. European Journal of Operational Research, 186(1), 351-357.
Kaul, A., & Sapp, S. (2006). Y2K fears and safe haven trading of the US dollar.Journal of International Money and Finance, 25(5), 760-779.
Korobilis, D., & Yilmaz, K. (2018). Measuring dynamic connectedness with large Bayesian VAR models (January 10, 2018). Available at SSRN: http://dx.doi.org/10.2139/ssrn.3099725.
Lintner, J. (1965). The Valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. The Review of Economics and Statistics, 47(1), 13-37.
Liu, H., Manzoor, A., Wang, C., Zhang, L., & Manzoor, Z. (2020). The COVID-19 outbreak and affected countries stock markets response. International Journal of Environmental Research and Public Health, 17(8), 2800. https://doi.org/10.3390/ijerph17082800.
Markowitz, H. (1952) Portfolio selection. The Journal of Finance, 7(1), 77-91. https://doi.org/10.1111/j.1540-6261.1952.tb01525.x.
Markowitz, H. (1959). Portfolio selection: Efficient diversification of investment. New York: John Wiley & Sons.
McCown, J. R., & Zimmerman, J. R. (2006). Is gold a zero-beta asset? Analysis of the investment potential of precious metals. Analysis of the Investment Potential of Precious Metals (July 24, 2006). Available at SSRN: https://ssrn.com/abstract=920496.
Merton, R. (1971). Optimum consumption and portfolio rules in a continuous-time model. Journal of Economic Theory, 3(4), 373-413.
Mossin, J. (1966). Equilibrium in a capital asset market. Econometrica, 34(4), 768-783. http://dx.doi.org/10.2307/1910098.
Noeth, B. J., & Sengupta, R. (2010). Flight to safety and US treasury securities. The Regional Economist, 18(3), 18-19.
Ramelli, S., & Wagner, A. F. (2020). Feverish stock price reactions to the novel coronavirus. Forthcoming, Review of Corporate Finance Studies, Swiss Finance Institute Research Paper (No.20-12). Available at SSRN: https://ssrn.com/ abstract=3550274.
Rasiah, D. (2012). Post-modern portfolio theory supports diversification in an investment portfolio to measure investment’s performance. Journal of Finance and Investment Analysis, 1(1), 69-91.
Rockafellar, R.T. & Uryasev, S. (2002). Conditional value-at-risk for general loss distributions. Journal of Banking and Finance, 26(7), 1443–1471.
Samuelson, P.A. (1969). Lifetime portfolio selection by dynamic stochastic programming. The Review of Economics and Statistics, 51(3), 239-246. https://doi.org/10.2307/1926559.
Shahbaz, M., Tahir M. I., Ali I., & Rehman, I. U. (2014). Is gold investment a hedge against inflation in Pakistan? A co-integration and causality analysis in the presence of structural breaks. The North American Journal of Economics and
Finance, 28(April 2014), 190-205.
Shahzad, S. J. H., Aloui, C., Jammazi, R., & Shahbaz, M. (2019). Are Islamic bonds a good safe haven for stocks? Implications for portfolio management in a timevarying regime-switching copula framework. Applied Economics, 51(3), 219-238.
Shahzad, S. J. H., Bouri, E., Roubaud, D., Kristoufek, L., & Lucey, B. (2019). Is Bitcoin a better safe-haven investment than gold and commodities? International Review of Financial Analysis, 63(May 2019), 322-330.
Sharpe, W. F. (1964) Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance, 19(3), 425-442.
Sherman, E. J. (1986). Gold investment: Theory and application. New York: Prentice Hall.
Śmiech, S., & Papież, M. (2017). In search of hedges and safe havens: Revisiting the relations between gold and oil in the rolling regression framework. Finance Research Letters, 20(February 2017), 238-244.
Stensås, A., Nygaard, M. F., Kyaw, K., & Treepongkaruna, S. (2019). Can bitcoin be a diversifier, hedge or safe haven tool?. Cogent Economics & Finance, 7(1), 1593072.
Urquhart, A., & Zhang, H. (2019). Is Bitcoin a hedge or safe haven for currencies? An intraday analysis. International Review of Financial Analysis, 63(May 2019), 49-57.
Yarovaya, L., Elsayed, A. H., & Hammoudeh, S. M. (2020). Searching for safe havens during the COVID-19 pandemic: Determinants of spillovers between Islamic and conventional financial markets (June 11, 2020). Available at SSRN:
Zhang, D., Hu, M., & Ji, Q. (2020). Financial markets under the global pandemic of COVID-19. Finance Research Letters, 36(October 2020), 101528.
Journal of Islamic Monetary Economics and Finance is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.