Crude oil and Islamic sectoral stocks: Asymmetric TVP-VAR connectedness and investment strategies

Abstract

In this study we examine the asymmetric propagation of return spillovers between oil prices and Islamic stock prices at the sector level. To achieve that, we extend the work of Antonakakis et al. (2020a), by introducing measures of asymmetric dynamic connectedness based on a time-varying vector autoregressive (TVPVAR) model. Furthermore, in the spirit of Broadstock et al. (2020), we perform dynamic portfolio exercises based on common hedging techniques and the minimum connectedness portfolio approach to find out what better captures asymmetry. Our daily dataset includes Brent crude oil and nine Islamic sectoral stocks spanning from April 25, 2013 to September 2, 2021. The findings reveal that, with the exception of the early stages of the COVID pandemic, negative connectedness dominates the sample period, indicating that investors in Islamic markets tend to react more to negative news. In turn, the prevalence of positive connectedness in early 2020 suggests that Islamic markets were relatively resilient to the pandemic. Finally, the minimum connectedness portfolio approach captures asymmetry effectively thereby providing significant insights for portfolio management.