How do Islamic equity markets respond to good and bad volatility of cryptocurrencies? The case of Bitcoin

This paper investigates the differential sensitivity of Sharia-compliant stocks to Bitcoin's realized volatility of positive and negative intraday returns in bear, normal, and bull market states. We use a quantile regression approach, after orthogonalizing raw equity returns with respect to a variety of relevant global factors and accounting for structural breaks in the data. For developed markets, the results indicate that upside volatility tends to exert contemporaneous and lagged negative influences on Islamic stocks more in bear than in bull market conditions, whereas the downside counterpart positively affects returns when Sharia-compliant equities are in bear and bull phases. For emerging markets, we find that Bitcoin's upside (downside) volatility has lagged negative (positive) effects on returns across all market regimes. The dependence structures tend to be asymmetric and have noticeably become stronger in the last two years than in earlier periods of the sample. Our evidence offers important implications for investors.