Is Islamic Financial Portfolio Allocation Sufficient to Safeguard Investors During Economic Downturns?

Objectives: This study aims to explore the dynamic interactions between Islamic and conventional financial markets at both national and international levels. It also evaluates the role of Islamic indices in enhancing portfolio performance and resilience, particularly during periods of economic stress such as the COVID-19 recession. Methods: The research employs a Vector Autoregressive (VAR) model, Granger causality tests, impulse response functions, and variance decomposition to analyze market interdependencies. Results: The empirical findings reveal asymmetric relationships between Islamic and conventional markets. While Islamic markets are significantly influenced by conventional markets, the reverse effect is minimal. National Islamic indices exert a stronger influence on global Islamic trends than they receive, suggesting limited global integration within Islamic finance sector. In contrast, conventional markets exhibit strong bidirectional interdependence. Portfolio analysis indicates that international diversification, particularly through Islamic indices, enhances resilience and performance. Islamic assets yielded higher returns with lower risk during the COVID-19 crisis. Conclusions: Islamic financial instruments can serve as effective stabilizing assets during periods of economic uncertainty. The study highlights the strategic importance of Islamic finance in global portfolio diversification and risk management. The results support the inclusion of Islamic indices in international investment strategies to improve stability and performance, especially in turbulent market conditions.