Asia-Pacific Islamic Stocks and Gold: A Markov-switching Copula Estimation

Abstract

This paper tests regime changes of the conditional dependence between Asia-Pacific Islamic stocks and gold. Relying on a time-varying Student’s t copula with Markov-switching autoregressive conditional heteroskedasticity (MSGARCH), this paper finds the dependence is negative and significant, implying strong diversification benefits. In addition, the copula with MSGARCH is the best-fitting model. Finally, the copula with a single-regime specification consistently outperforms the other models when forecasting value at risk.