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Dynamic and frequency connectedness across Islamic stock indexes, bonds, crude oil and gold

Dynamic and frequency connectedness across Islamic stock indexes, bonds, crude oil and gold This paper aims to investigate the connectedness of Islamic Stock Markets in five regional financial systems, namely, the United States, the United Kingdom, Europe (EU), GCC (Gulf Cooperation Council) and APAC (Asia-Pacific Countries), and across different asset classes (i.e. bonds, gold and crude oil).Design/methodology/approachThis methodology is inspired by Diebold and Yilmaz (2012) and Barunlik and Krehlik (2017) for performing dynamic variance decomposition network and for studying time–frequency dynamics of connectedness at different frequencies.FindingsResults show that the nature of connectedness over the past decade is time–frequency dynamics. The decomposition of the total volatility spillovers is mostly dominated by the long-run component. Furthermore, dominant regions are the largest contributors of spillover index, with the lowest contribution in the system coming from the GCC market. Results also reveal a slightly higher volatility spillover index of Islamic than conventional equity indexes. Finally, the system that encompasses commodities and Islamic finance instruments, generates the much lower volatility spillover.Originality/valueThe findings have significant implications for portfolio managers who are interested in being able to predict asset returns, as well as for policymakers who are concerned with market stability. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Islamic and Middle Eastern Finance and Management Emerald Publishing

Dynamic and frequency connectedness across Islamic stock indexes, bonds, crude oil and gold

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1753-8394
DOI
10.1108/imefm-02-2018-0043
Publisher site
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Abstract

This paper aims to investigate the connectedness of Islamic Stock Markets in five regional financial systems, namely, the United States, the United Kingdom, Europe (EU), GCC (Gulf Cooperation Council) and APAC (Asia-Pacific Countries), and across different asset classes (i.e. bonds, gold and crude oil).Design/methodology/approachThis methodology is inspired by Diebold and Yilmaz (2012) and Barunlik and Krehlik (2017) for performing dynamic variance decomposition network and for studying time–frequency dynamics of connectedness at different frequencies.FindingsResults show that the nature of connectedness over the past decade is time–frequency dynamics. The decomposition of the total volatility spillovers is mostly dominated by the long-run component. Furthermore, dominant regions are the largest contributors of spillover index, with the lowest contribution in the system coming from the GCC market. Results also reveal a slightly higher volatility spillover index of Islamic than conventional equity indexes. Finally, the system that encompasses commodities and Islamic finance instruments, generates the much lower volatility spillover.Originality/valueThe findings have significant implications for portfolio managers who are interested in being able to predict asset returns, as well as for policymakers who are concerned with market stability.

Journal

International Journal of Islamic and Middle Eastern Finance and Management – Emerald Publishing

Published: Aug 21, 2019

Keywords: Sukuk; Systemic risk; Connectedness; Islamic indexes; Spectral decomposition; G17; G15; G16

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