This paper aims to study the asymmetric relationship between gold and two Shariah-compliant indices in an emerging market Pakistan. This paper also tests the safe-haven properties of gold while optimizing the risk-return characteristics of Shariah-compliant equity portfolios.
This study considers two Shariah-compliant indices, KSE Meezan Index (KMI-30) and PSX-KMI All Share Islamic Index (KMI-ALL) in Pakistan market. Index prices and gold price data are obtained for the time period July 3, 2009 to November 1, 2023. Two state of art approaches, the vector autoregressive for value at risk and the cross-quantilogram are used to examine the directional spillover from equity indices to gold at different quantiles. This analysis provide insight from both bullish and bearish markets.
Results revealed that spillover effect from gold to Shariah-compliant stocks is significant at both downside and upside quantile. Cross-quantilogram analysis reveals a negative and significant correlation for the higher quantiles while the results are insignificant at lower quantile. These properties confirm that gold can be used as a successful hedge by Shariah-compliant investors. The significance level is sensitive to the choice of selection of lag terms. Finally, the strength of impact varies at weekly and monthly basis.
To the best of the authors’ knowledge, this is the first attempt to investigate the hedging properties of gold against two Shariah-compliant indices in an emerging market like Pakistan.
