Do Islamic indices have connectedness with commodity futures? Implications for portfolio strategies and hedging effectiveness: evidence from India

Purpose This study aims to examine the dynamic return connectedness between Shariah Islamic indices and commodity futures returns. Further, the study also explores the possible implications for portfolio strategies and hedging effectiveness in the Indian context. Design/methodology/approach We mainly focus on four major Shariah Islamic indices and nine actively traded non-agricultural commodities daily closing prices data spanning from 6th May 2014 to 29th September 2023. The authors employ a novel time-varying parameter vector autoregression connectedness model, as well as minimum variance portfolio (MVP), minimum correlation portfolio (MCP), minimum connectedness portfolio, and hedging efficiency models to construct optimal portfolios using Shariah Islamic indices and commodities futures returns. Findings The study results show a strong dynamic return connectedness between Shariah Islamic indices and commodity futures returns. However, the net return spillover results suggest that Nifty 500 Shariah and Nifty Shariah 25 are the highest net spillover transmitters to commodity futures returns. On the other hand, commodities such as gold, crude oil and natural gas are the highest net recipients of return spillovers. Besides, the portfolio strategies and hedging effectiveness results document that gold has the highest weight under both MVP and MCP models. Practical implications The present study offers useful insights for investors and portfolio managers on constructing optimal portfolios using hedging techniques to efficiently manage the risks associated with their portfolios. Second, the findings indicate that incorporating Shariah Islamic indices and commodities into their portfolios could provide better diversification and timely risk mitigation. Finally, the results provide pertinent information for market regulators to understand how the Islamic Shariah indices and commodity markets respond to unprecedented events. Originality/value This could be the maiden attempt in the Indian context to test the dynamic return connectedness, portfolio strategies and hedging effectiveness of Shariah Islamic indices and commodity futures returns.