When Does Oil Matter for Islamic Equities? Time–Frequency Evidence from Developed and Emerging Markets

Abstract

This study examines when and at which investment horizons crude oil becomes economically relevant for Islamic equity markets. Motivated by a literature that increasingly treats Shariah-compliant equities as a distinct asset class while emphasizing time-varying dependence, diversification, and wavelet-based spillovers, the paper investigates whether the oil–equity nexus differs between developed and emerging Islamic markets. Using daily observations from January 1996 to August 2025, the analysis combines Brent crude oil prices with the Dow Jones Islamic World Developed Market and Dow Jones Islamic World Emerging Markets indices. Returns are evaluated through conventional correlation analysis and wavelet coherence, allowing dependence to vary simultaneously across time and trading-day horizons. The unconditional results show moderate co-movement between developed and emerging Islamic equities, with a correlation of approximately 0.52, but substantially weaker average correlations between Brent oil and developed and emerging Islamic equities, at approximately 0.20 and 0.18, respectively. The time–frequency evidence, however, reveals that these averages conceal pronounced heterogeneity. Developed and emerging Islamic equities display broad and persistent coherence at medium- and longer-term horizons, indicating stronger integration as the investment horizon lengthens, whereas short-run dependence remains more fragmented. In contrast, oil–Islamic equity coherence is episodic rather than permanent, intensifying within specific time–frequency clusters and weakening considerably in others. Phase patterns further suggest that lead–lag relations are not stable across the sample. These findings show that low unconditional oil–equity correlations should not be interpreted as evidence of consistently strong diversification benefits. Oil can become materially connected to Islamic equities during market regimes and holding periods, while cross-market diversification between developed and emerging Islamic equities also diminishes at longer horizons. The study contributes to Islamic asset-pricing and energy-finance research by providing long-horizon comparative evidence that dependence is market-specific, regime-dependent, and horizon-sensitive, with direct implications for portfolio allocation, hedging, and risk management for Shariah-compliant global investors.