Portfolio diversification benefits before and during the times of COVID-19: evidence from USA

Abstract

AbstractThis paper investigates the portfolio diversification benefits for Islamic and conventional investors in the USA with its major trading partners (United Kingdom, Canada, China, Japan, Malaysia, and Turkey) before and during the COVID-19 crisis period. Using daily data from 2007 to 2020, we employ three relevant time-varying and timescale-dependent techniques, the continuous wavelet transform (CWT) analysis, the wavelet multiple correlation (WMC), and the wavelet multiple cross-correlation (WMCC). The findings suggest that conventional and Islamic US investors who invest with major trading partners may reap large diversification benefits for very short investment horizons (4–8), except for Sharia Malaysia index. However, they may not reap benefits for investment horizons of 8–16 and longer, except for China. In addition, COVID-19 crisis caused a poor diversification opportunity for US investors regardless of the regime they follow (conventional or Islamic). Moreover, the American industrial market depicts a state of impending perfect market integration. Finally, the UK and Canada seem to be the potential market leaders in different wavelet scales. These findings yield important policy implications.