Portfolio diversification opportunities for U.S. Islamic investors with its trading partners when the world catches a cold: A Multivariate-GARCH and wavelet approach

The goal of this study is to analyse the co-movements and the portfolio diversification between the Islamic index of U.S. and its top trading partners, namely Canada, China, Mexico, Japan and Germany, using Morgan Stanley Capital International (MSCI) daily returns data from January 2013 to August 2020. We employed three main techniques: multivariate-GARCH-DCC, CWT and MODWT to analyse whether these markets have any diversification opportunities. Our findings reveal that, first, we observed that the U.S. Islamic index and its trading partners showed increased integration after U.S. implemented its first China-specific tariffs in 2018 and were closely integrated during the Covid-19 pandemic in 2020. Second, CWT results show that investors would gain diversification benefits in China and Mexico under specific investment horizons. Third, the results of MODWT shows Japan Islamic index provide short term diversification opportunity and Mexico Islamic index for longer term investments