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Do the Islamic Stock Market Returns Respond Differently to the Realized and Implied Volatility of Oil Prices? Evidence from the Time–Frequency Analysis

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  • Muhammad Mahmudul Karim
  • Mansur Masih

Abstract

This paper makes an initial attempt to investigate the responsiveness of the Islamic stock market returns to the realized and implied volatility of oil prices at different investment horizons. The CBOE crude oil volatility index (OVX) is used for the implied volatility of oil price. The data are weekly from May 2007 to May 2017. The wavelet coherence analysis indicates that the negative effect of the implied volatility of oil price on Islamic stock market returns is more persistent compared to that of realized volatility across both time and scales. This finding tends to indicate that the Islamic stock market returns are more sensitive to the implied volatility of oil price compared to that of realized volatility. This may be due to the implied volatility, unlike the realized volatility, containing information of both historical volatility of oil spot prices and also predicted volatility. The results are plausible and have strong policy implications.

Suggested Citation

  • Muhammad Mahmudul Karim & Mansur Masih, 2021. "Do the Islamic Stock Market Returns Respond Differently to the Realized and Implied Volatility of Oil Prices? Evidence from the Time–Frequency Analysis," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 57(9), pages 2616-2631, July.
    • Handle: RePEc:mes:emfitr:v:57:y:2021:i:9:p:2616-2631
    DOI: 10.1080/1540496X.2019.1663409
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    Cited by:

    1. Karim, Muhammad Mahmudul & Kawsar, Najmul Haque & Ariff, Mohamed & Masih, Mansur, 2022. "Does implied volatility (or fear index) affect Islamic stock returns and conventional stock returns differently? Wavelet-based granger-causality, asymmetric quantile regression and NARDL approaches," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 77(C).
    2. Sheng, Xin & Kim, Won Joong & Gupta, Rangan & Ji, Qiang, 2023. "The impacts of oil price volatility on financial stress: Is the COVID-19 period different?," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 520-532.
    3. Karim, Muhammad Mahmudul & Ali, Md Hakim & Yarovaya, Larisa & Uddin, Md Hamid & Hammoudeh, Shawkat, 2023. "Return-volatility relationships in cryptocurrency markets: Evidence from asymmetric quantiles and non-linear ARDL approach," International Review of Financial Analysis, Elsevier, vol. 90(C).
    4. Ghaemi Asl, Mahdi & Adekoya, Oluwasegun Babatunde & Rashidi, Muhammad Mahdi & Ghasemi Doudkanlou, Mohammad & Dolatabadi, Ali, 2022. "Forecast of Bayesian-based dynamic connectedness between oil market and Islamic stock indices of Islamic oil-exporting countries: Application of the cascade-forward backpropagation network," Resources Policy, Elsevier, vol. 77(C).

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