Perspectives on Islamic Equities, Financial Contagion, and Risk Management: Benefits of Precious Metals

Abstract

This research paper examined the hedging effectiveness, dynamic de pendence, safe haven ability and portfolio diversification benefits of alternative assets (Precious Metals) with Conventional and Islamic stock indices. The data ranged March 2011 to March 2021 and copula model with switching dependence is used. The estimated transition probabilities have shown high persistence of the same dependence regime in all estimated pairs. The research documented that the use of precious metals with stocks for diversification is a favorable choice, proving them to be best suitable solution to avoid risks. They also provide save heaven effect along with diversification benefits. Risk reduction benefits vary with respect to portfolio types. Findings of the research reveal that negative shocks pushes investors to seek refuge in safe haven assets in order to safeguard their investments from extreme negative shocks. For most of the situations studied, precious metals provides the best and effective hedge to stock returns. Overall addition of alternative assets in stocks portfolio reduces risks and provide better diversification benefit. Results vary depending upon the circumstances of the country. These findings endow with useful insights for policy makers, fund managers, investors, and risk management practitioner.