Dynamics of islamic stock market returns and exchange rate movements in the ASEAN Countries in a regime-switching environment: Implications for the islamic investors and risk hedgers

This research is motivated by the increasing systemic relevance of Islamic finance and Islamic stock markets beyond the borders of Arabia and other Muslim majority territories. It makes the initial attempt to consider the degree to which the five Islamic stock markets in the original ASEAN-5 and their foreign exchange markets are correlated with a view to assessing the feasibility of policy initiatives to enhance ASEAN Islamic stock market integration and the implications for portfolio investors and risk hedgers. We applied a combination of Wavelet transformation model with appropriate regime-switching models to investigate the dynamic linkages between the foreign exchange and Islamic stock market returns for these ASEAN countries (Malaysia, Indonesia, Thailand, Philippines, Singapore). The analysis tends to indicate that stock returns of the ASEAN countries evolve according to two different regimes: a low volatility regime and a high volatility regime, which explains the bearish and bullish market periods. Furthermore, we investigated what evidence Markov switching analysis unfolds in regard to the dynamic linkage between the Islamic stock markets and exchange rate volatility of the ASEAN countries during both the calm and turbulent periods. This seeks to provide a valuable insight for the Islamic Investors, fund and portfolio managers, and policymakers whether to pay heed to these regime-specific dynamic interactions or not, particularly when they make capital budgeting decisions and implement regulation policies.