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Dynamic dependence of the global Islamic equity index with global conventional equity market indices and risk factors

Author

Listed:
  • Hammoudeh, Shawkat
  • Mensi, Walid
  • Reboredo, Juan Carlos
  • Nguyen, Duc Khuong

Abstract

Past studies have shown considerable differences between equity markets in conventional and Islamic financial systems, in terms of financial products and principles. Using a copula approach, this study shows that the global Islamic equity market index (represented by the Dow Jones Islamic Market Index) exhibits significant dependence with three major global conventional equity indices (Asia, Europe, and United States) and the global factors (oil prices, stock market implied volatility (VIX), the U.S. 10-year Treasury bond interest rate, and the 10-year European Monetary Union government bond index) which are common to the world financial system and pertinent to contagion risks in the case of financial crises. Moreover, this dependence varies over time for all cases except the S&P 500 index and is also asymmetric between bear and bull markets in some cases. Our findings thus suggest that the Sharia-compliance rules are not restrictive enough to make the global Islamic equity market index very different from the conventional indices. In addition, the decoupling hypothesis of the Islamic equity universe from the conventional financial system is not well supported by our empirical evidence.

Suggested Citation

  • Hammoudeh, Shawkat & Mensi, Walid & Reboredo, Juan Carlos & Nguyen, Duc Khuong, 2014. "Dynamic dependence of the global Islamic equity index with global conventional equity market indices and risk factors," Pacific-Basin Finance Journal, Elsevier, vol. 30(C), pages 189-206.
    • Handle: RePEc:eee:pacfin:v:30:y:2014:i:c:p:189-206
    DOI: 10.1016/j.pacfin.2014.10.001
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    References listed on IDEAS

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    More about this item

    Keywords

    Islamic stock index; Conventional stock indices; Global factors; Copulas; Tail dependence;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G1 - Financial Economics - - General Financial Markets

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