Hedging Islamic assets with the blockchain halal index: A regime‐switching model

Abstract This study examines the Blockchain Halal Index ( HLC ) hedging ability for various Islamic assets (Islamic equities, Sukuks, and Sharia‐compliant gold‐backed cryptocurrencies) from February 16, 2019, to March 19, 2023. It employs Markov regime‐switching to identify market states, dynamic conditional correlation to assess changing relationships, Bayesian time‐varying coefficient VAR for nuanced modeling, and time‐varying hedging analysis to evaluate risk management inferences. Such a combination of methods allows us to capture potential shifts in the relationship between the HLC and Islamic assets across two volatility regimes (high and low). The results demonstrate that, in high volatility, the HLC shows weak positive correlations with Islamic assets, emphasizing some diversification benefits during turbulent periods. In the low‐volatility regime, the HLC is a substantial hedge due to its negative correlations with the Islamic index. The optimal hedge ratios tend to decline, especially around the COVID‐19 outbreak, and the hedging effectiveness varies with time, notably during crisis periods. The findings provide critical insights for Shariah‐compliant investors and portfolio managers in Islamic assets by underlining asset allocation and hedging possibilities to enhance portfolio performance and manage risk during unstable market conditions. In this regard, they can refine diversification strategies across volatility regimes, and ethical investors may consider the HLC as an alternative asset with potential hedging properties. For regulators, the results point to the relevance of supporting the development of such indices to enhance financial stability within Islamic finance.