Tail dependence risk exposure and diversification potential of Islamic and conventional banks

Jose Arreola Hernandez, Khamis Al Yahyaee, Shawkat Hammoudeh, Walid Mensi

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Abstract

This paper undertakes a rolling window comparative analysis of risks for portfolios consisting of GCC Islamic and conventional bank indices. We draw our empirical results by employing canonical, drawable and regular vine copula models, as well as by implementing a portfolio optimization method with a conditional Value-at-Risk constraint. We find evidence of higher riskiness in the group of Islamic banks relative to the group of conventional banks across each of the financial rolling window scenarios under consideration. Specifically, a greater negative (nonlinear) tail asymmetric dependence is observed in the pairs of Islamic banks’ relationships. The results also show that the optimal portfolio model supports a clear preference towards the group of conventional banks in regard to risk minimization and diversification benefits.

Original languageEnglish
JournalApplied Economics
DOIs
Publication statusPublished - Jan 1 2019

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Keywords

  • conditional Value-at-Risk
  • Islamic and conventional banks
  • nonlinear dependence risk
  • portfolio diversification
  • vine copulas

ASJC Scopus subject areas

  • Economics and Econometrics

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