Comovement and resiliency of Islamic equity market: Evidence from GCC Islamic equity index based on wavelet analysis

Dewandaru, Ginanjar and Alaoui, Abdelkader and Masih, A. Mansur M. and Alhabshi, Syed Othman (2013): Comovement and resiliency of Islamic equity market: Evidence from GCC Islamic equity index based on wavelet analysis.

Abstract

Co-movements in equity markets may reflect either financial contagion or stock market integration. While the former tends to demonstrate financial stability and resiliency, the latter has played an important role for stock market development. This paper attempts to investigate the co-movements, including its transmission channels, of the Gulf Cooperation Council (GCC) Islamic equity index with other Islamic equity indices (Asia Pacific, US, Eurozone, and ASEAN) as well as with Global Sukuk index (Islamic bond). As to the methodology, we employ multi-time scale wavelet analysis as one of the latest techniques in finance to unveil the time varying and multi-horizon nature of these comovements to capture both time and frequency domain simultaneously. Our finding shows that the most recent US-born subprime crisis has generated both long-term and short-term shocks to volatility of all Islamic equity indices. The GCC Islamic equity index is the most susceptible with the shocks mostly transmitted via fundamental linkages. Notably, the nature of co-movements amongst Islamic equity indices are more or less similar as those amongst conventional counterparts. We also find no evidence of flight-to-quality for Islamic investors to flee from compliant equity in GCC to compliant bond during market turbulance, given the leading role of Islamic equity index over Sukuk index in the short run and long run. Finally, we find the nature of weak stock market integration between GCC equity market and others. Some recommendations have been proposed to improve stock market integration, including its stability and resiliency.

• Item Type: MPRA Paper
• Language: English
• Keywords: Islamic finance, Shariah, Sukuk, co-movement, shock transmission, financial crisis, contagion, interdependence, causality, wavelet analysis, wavelet coherency, GCC.
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

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