In this study, we aim to provide a comprehensive analysis of the risk management potential of sectoral Credit Default Swaps (CDSs) within financial portfolios. Our objectives are threefold: (i) to investigate the safe haven properties of sectoral CDSs; (ii) to assess their hedging effectiveness and evaluate the diversification benefits of incorporating sectoral CDSs into both conventional and Islamic stock market portfolios; and (iii) to compare these findings with those obtained from alternative assets such as the VSTOXX, gold, and Bitcoin indices. To achieve this, we estimate time-varying hedge ratios using a range of multivariate GARCH (MGARCH) models and subsequently compute hedging effectiveness metrics. Conditional correlations derived from the Asymmetric Dynamic Conditional Correlation (ADCC) model are employed in linear regression analyses to assess safe haven characteristics. This methodology is applied across different subperiods to capture the impact of the crypto currency bubble and the COVID-19 pandemic on hedging performance.

Our aim is at three feels: i) study safe haven properties of sectoral CDS; ii) study hedging effectiveness and measure the diversification benefits of introducing them in both Conventional and Islamic stock markets portfolios and iii) compare these results with VSTOXX, Gold and Bitcoin indices. To do this, we estimate time varying hedge ratio using (A)DCC and GOGARCH models and then deduce hedging effectiveness.. We follow the same methodology for each sub-period and each refit to test the effect of bubble crypto currency and COVID-19 pandemic on hedging effectiveness. Empirical results show the superiority of industrial CDS sectoral index to hedge both conventional and Islamic stock markets whether long or short term despite that their performances were reduced slightly during the second and third periods. VSTOXX and Others sectoral CDS indices offers Hedging performances that are generally better than Bitcoin and gold.