Dynamic spillover and connectedness between Fintech and Islamic banking markets: evidence from country-level data with portfolio implications

Purpose This paper explores the interactive link between Islamic banking and Fintech indices, emphasizing their functions for portfolio x-diversification. This study aims to investigate the contagion and decoupling hypotheses and the extent to which specific Islamic banking indices act as a safe-haven. Applying the Time-Varying Parameter Vector Auto Regression (TVP-VAR) approach, the study aims to investigate return spillovers, directional connectivity and the overall influence of these indices in improving portfolio returns under varying economic mechanisms. Design/methodology/approach This paper uses Chatziantoniou et al. (2021) TVP-VAR model to examine the dynamic interconnectedness of Islamic Banking and Fintech indices. Findings The analysis shows a low correlation in terms of return transmission between Islamic banking indices and Fintech indices and positive net spillover from Fintech indices on Islamic banking. This indicates that while there is a weak coupling between Fintech and Islamic banking, there can be enhancements in returns on changes in Fintech. Also, the study uncovers that Islamic banking indices can act as a safe hedge during testing times and provide helpful information for improving portfolio efficiency and diversification plans. These results highlight the significance of future research in studying the links and the hedging and diversification benefits of these financial sectors Originality/value This research contributes to the existing literature by examining the untapped possibility of using Islamic banking and Fintech indices for portfolio diversification. This study uses the TVP-VAR model to examine their relationship and the use of the Islamic banking index as a portfolio hedge. The success reproductions show a limited return transmission from Islamic banking to the Fintech indices. However, a positive cross-backward effect exists in the opposite direction of the assumed relationship, giving helpful information for investors aiming at diversification free from the Marzipan effects.