Have commodities and equity become a "financialized market of one"? Is such oneness persistent? Do diversification benefits still exist? Evidence behind these enquiries offers important insights for policymakers, governments, traders and investors, and constitutes the main motivation for this paper. To assess the viability of commodities as an alternative asset class for Islamic equity investors, we present evidence on the extent to which returns in commodities and Islamic equity markets move in sync in both time and frequency domains. Our findings reveal that, throughout the January 1999 - April 2015 period, correlations between commodities and Islamic equity were highly volatile and time sensitive. While there had been minimal correlation between commodities and Islamic equity prior to 2008, the relationship has strengthened since 2008, possibly attributed to the anomaly arising from the global financial crisis. Trends in the recent two years, however, suggest that the links between commodities and Islamic equity are heading towards their pre-crisis equilibrium, offering again potential diversification opportunities for investors. Divergence in correlations reveals that the behaviour of commodities is heterogeneous with varying potentials for diversification. Overall, gold, natural gas, soft commodities, grains and livestock are better portfolio diversifiers than oil and other metals. Relative to medium to long term investors, short-term investors gained better diversification benefits in most commodities during bullish, bearish and market recovery periods.

This paper investigates whether commodities offer potential diversification benefits for Islamic equity index investors in light of possible financialization of commodity markets. Using MGARCH-DCC and Wavelet Coherence analyses, our findings reveal that correlations between commodity markets and the Dow Jones Islamic Market World Index are time-varying and highly volatile throughout the January 1999 - April 2015 period. A substantial and persistent increase was observed in the return correlations between commodities and Islamic equity at the onset of the 2008 financial crisis. However, trends in the recent two years suggest that this association is heading towards its pre-crisis levels, offering again diversification benefits for Islamic equity holders. These benefits vary across different commodities in various time scales. Overall, gold, natural gas, soft commodities, grains and livestock are better portfolio diversifiers than oil and other metals. Relative to medium-to-long term investors, short-term investors (less than 32 days horizon) gained better diversification benefits in most commodities during bullish, bearish and market recovery periods. These findings have implications for investors who are heterogeneous in risk tolerance and time preference as well as for policymakers who are concerned with market stability.