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Islamic equity market integration and volatility spillover between emerging and US stock markets

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  • Majdoub, Jihed
  • Mansour, Walid

Abstract

The purpose of this paper is to study the conditional correlations across the US market and a sample of five Islamic emerging markets, namely Turkey, Indonesia, Pakistan, Qatar, and Malaysia. The empirical design uses MSCI (Morgan Stanley Capital International) Islamic equity index since it applies stringent restrictions to include companies. Indeed, two main restrictions must be met: (i) the business activity must be compliant with Shari’ah (i.e., Islamic law) guidelines and (ii) interest-bearing investments and leverage ratios should not exceed upper limits. Three models are used: multivariate GARCH BEKK, CCC, and DCC. The estimation results of the three models show that the US and Islamic emerging equity markets are weakly correlated over time. No sheer evidence supports that the US market spills over into the Islamic emerging equity markets. Besides interpreting the results in terms of weak market integration, the peculiar specificities of the Islamic finance industry and the admittance conditions to the MSCI Islamic equity index contribute to explaining them. Indeed, Islamic finance bans interest-bearing investments and imposes some rules, such as asset-backing, which has sizeable impacts on volatility spillover and shocks transmissions, alongside with the close linkage between real and financial sectors. These findings suggest that investors should take caution when investing in the Islamic emerging equity markets and diversifying their portfolios in order to minimize risk.

Suggested Citation

  • Majdoub, Jihed & Mansour, Walid, 2014. "Islamic equity market integration and volatility spillover between emerging and US stock markets," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 452-470.
  • Handle: RePEc:eee:ecofin:v:29:y:2014:i:c:p:452-470
    DOI: 10.1016/j.najef.2014.06.011
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    More about this item

    Keywords

    Islamic finance; Volatility spillovers; Multivariate GARCH; Conditional correlations; BEKK; DCC; CCC;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G1 - Financial Economics - - General Financial Markets
    • F3 - International Economics - - International Finance
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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