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

Jose Arreola Hernandez 1 Khamis Hamed Al-Yahyaee 2 Shawkat Hammoudeh 3 Walid Mensi 2
1 Rennes School of Business
2 SQU - Sultan Qaboos University
3 Drexel University
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.
Keywords : Islamic and conventional banks vine copulas conditional Value-at-Risk nonlinear dependence risk portfolio diversification
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Journal articles
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https://hal-rennes-sb.archives-ouvertes.fr/hal-02194592
Contributor : Steven Gouin <>
Submitted on : Thursday, July 25, 2019 - 4:39:49 PM
Last modification on : Thursday, August 22, 2019 - 1:03:23 AM

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Jose Arreola Hernandez, Khamis Hamed Al-Yahyaee, Shawkat Hammoudeh, Walid Mensi. Tail dependence risk exposure and diversification potential of Islamic and conventional banks. Applied Economics, Taylor & Francis (Routledge), 2019, 51 (44), pp.4856-4869. ⟨10.1080/00036846.2019.1602716⟩. ⟨hal-02194592⟩

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