The Role of Islamic Securities in Multi-Market Portfolio Management in Iran: Analyzing the Inter-Market Dynamics of Currency, Gold, and Stock Markets with the TVP-QVAR Model

Extended Abstract
 
Introduction and Objectives: In the increasingly interconnected global financial landscape, portfolio management can no longer rely solely on traditional single-market approaches. In such an environment, cross-market diversification not only serves as an instrument for mitigating systematic and unsystematic risks but also plays a vital role in optimizing investment returns. This issue is particularly salient in Iran’s financial markets, where economic complexities and pronounced volatility amplify the importance of effective portfolio diversification. Among Sharia-compliant financial instruments, Islamic bonds (Sukuk)—characterized by relatively stable returns and lower risk—can enhance portfolio resilience against economic shocks. Consequently, an integrated and dynamic examination of the linkages between Sukuk and other key financial assets is essential for improving investment decision-making and designing optimal asset allocation strategies. The present study aims to analyze the dynamic interactions and mutual spillover effects among four pivotal markets in Iran’s economy (Sukuk, equities, foreign exchange, and gold) within a unified analytical framework. By exploring the mechanisms of shock transmission across these markets, the study provides deeper insight into inter-market risk propagation, identifies the direction and intensity of volatility spillovers, and clarifies the role of each asset in optimal portfolio diversification. Such understanding is crucial for investors seeking to construct portfolios that are both resilient to systemic risk and aligned with Islamic finance principles.
Research Methodology: This research is applied in purpose and descriptive-analytical in methodology. The theoretical foundations were developed through a comprehensive literature review and library research, while the empirical analysis is based on daily time-series data from Iran’s financial markets spanning 2014–2024 (1393–1403 in the Iranian calendar). Given the dynamic, multidimensional, and time-varying characteristics of these markets, conventional linear models are insufficient to adequately capture inter-market relationships and the evolution of risk transmissions. Therefore, advanced econometric techniques that account for structural changes and time-varying dynamics are required. To address this, the study employs the Time-Varying Parameter Quantile Vector Autoregression (TVP-QVAR) model. This model features dynamic parameters, allows multi-quantile distributional analysis, captures nonlinear and asymmetric relationships, and effectively accommodates high-volatility data. Through this framework, the magnitude and direction of volatility spillovers among markets are identified over time, thereby revealing which markets function as shock transmitters and which act as shock receivers in different periods. Furthermore, the model facilitates an assessment of the role of Sukuk as a low-systematic-risk, Sharia-compliant financial instrument within the complex network of Iran’s financial markets.
Results: The key findings reveal that the dynamics of the relationships among markets differ significantly across lower (recession/crisis), median, and upper (expansion) quantiles. In the lower quantiles—representing periods of negative growth or economic downturns—the most substantial volatility spillovers originate from the gold and foreign exchange markets toward the other markets, with gold exerting the strongest influence on the Sukuk market. The foreign exchange market also plays a central role in transmitting shocks. Under these conditions, the Sukuk market exhibits stable and conservative behavior, generating minimal spillovers to other markets. Inter-market correlations are notably high during downturns, particularly during crisis periods such as sanctions or the COVID-19 pandemic, approaching nearly complete co-movement. Owing to its relatively low correlation with other assets, Sukuk contributes effectively to portfolio diversification in such scenarios. At median growth rates (the middle quantiles), the pattern of shock transmission broadly resembles that of downturn conditions. The foreign exchange market remains the main source of volatility, while the stock market acts as an intermediary channel. Gold and foreign exchange maintain a strong, positive co-movement. Sukuk continues to be more of a shock receiver than a transmitter, and because of its weak correlation and limited spillover, it functions as a relatively safe-haven asset during moderate volatility periods. However, in the upper quantiles—representing high growth and inflationary phases—the intensity of inter-market interactions increases. Due to Sukuk’s sensitivity to real returns under inflation and its limited liquidity, its safe-haven function weakens. The stock market exhibits the strongest volatility spillover toward the foreign exchange market, suggesting a significant influence of the capital market on monetary dynamics. Even in this state, Sukuk remains largely a shock receiver rather than a transmitter, yet its importance in portfolio risk reduction becomes increasingly evident.
Discussion and Conclusion: Overall, the results demonstrate that the foreign exchange market serves as the dominant source of volatility and the key transmitter of shocks across all conditions. The gold market exhibits a dual role—acting both as a safe-haven asset and, in certain crisis situations, as a shock originator. Sukuk, characterized by low spillovers and stable behavior, possesses substantial potential for risk management and portfolio diversification. This underscores the value of Sukuk as a strategic instrument for mitigating volatility under varying phases of economic growth. Accordingly, it is concluded that economic policymakers can leverage Islamic financial instruments to design policy frameworks aimed at moderating portfolio risk and reducing exposure to systemic shocks in Iran’s economy. Moreover, development of the Sukuk market and diversification of its structures—such as Ijara, Murabaha, and Istisna Sukuk—can not only deepen the Islamic financial sector but also enhance its role as both a hedging mechanism and a safe-haven asset during crisis periods. Given the pivotal role of the foreign exchange market in shock transmission, strengthening stable and predictable exchange-rate policies becomes imperative. Relative stabilization of the exchange rate, the introduction of Sharia-compliant derivative instruments to manage currency volatility, and the reinforcement of foreign reserve buffers are among the practical measures that can prevent the contagion of volatility across markets.