Dynamic Spillover Effects of Dow Jones Islamic Market Indices Across Sectors

Recently, Shariah-compliant Islamic investments have received much attention from individual investors and financial professionals due to their resilience during global financial crises. Since the initial launching in 1999 in Bahrain, the Dow Jones Islamic MarketTM Indices (DJIMI) have become the industry benchmark in Islamic investments around the globe. In this paper, we aim to investigate the daily characteristics of dynamic return spillovers of DJIMI across 18 sectors. For empirical methods, we use the generalized spillover definition and measurements developed by Diebold, Yilmaz (2012). The static full-sample analysis shows that 82.90% of forecast error variance from return spillovers under time-invariant assumption. On the other hand, the rolling-sample analysis observes different pattern of total return spillover from Diebold, Yilmaz (2012) and Lee, Chang (2013) during the U.S. credit crisis (2008-2009), and ongoing European debt crisis (2012-present). In the analyses of time-varying directional and net directional return spillovers, we come upon that the DJIM indices are less connected to other parts of the world, contrasting to Diebold, Yilmaz (2012) and Lee, Chang (2013). These findings strongly suggest that DJIMI should be included in the construction of global portfolio to considerably increase the diversification benefit both for individual and professional investors.