Volatility linkages and value gains from diversifying with Islamic assets

Abstract Islamic assets, assets compliant with ethical and religious norms as codified in Sharia law, broaden the investor base. Do such investments contribute to mean-variance efficiency, if so, how? Using daily data on stock, bond, money market indices from nine countries 37 non-Islamic ones May 2007 June 2010, we show that adding an existing portfolio of conventional (non-Islamic) can expand frontier thereby create additional value through diversification. The “specialness” comes a smaller set common information lower degree cross-market hedging between markets. This reduces volatility linkages relative two assets. Including one asset lowers by up 3.16 percentage points after controlling for country-level fixed effects time-varying characteristics. Low are key increasing diversification benefits arise improvements global portfolio. Our research contributes international business literature highlighting potential bridging religious, ethical, cultural differences add new markets incomplete structure so doing increase benefits.