Are the Islamic and conventional money markets really highly correlated ? MGARCH-DCC and Wavelet approaches

Chen, Bai and Masih, Mansur (2017): Are the Islamic and conventional money markets really highly correlated ? MGARCH-DCC and Wavelet approaches.

Abstract

Criticisms of Islamic banks and financial products motivate us to re-examine whether the profit rate of Islamic financial products and conventional interest rate are highly related or not. It is well known that interest rate is highly influenced by the economic policies, so, in this research we will check the relation between several rates (Islamic and conventional) of return and economic policy uncertainty index respectively to make a judgement on the criticisms. We applied MGARCH-DCC and Continuous Wavelet Transform analyses to see the relations of these variables among different time scales with data collected from different sources. Unlike previous studies, economic policy is incorporated in the analyses in order to explain the issue. Our results tend to indicate that the Islamic profit- and- loss sharing (PLS) rates have divergent relations with interest rates. Islamic Murabahah profit rate is less correlated with LIBOR, while Islamic Mudarabah profit rate is highly correlated with LIBOR. That shows both the uniqueness and similarity of Islamic financial products with the conventional interest rate. Hence the policy makers, if they intend to, can make Islamic money market more independent of the influence of conventional market.

• Item Type: MPRA Paper
• Language: English
• Keywords: MGARCH; Wavelet; PLS; Islamic profit rate; Murabahah; Mudarabah; LIBOR
• Subjects: 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 > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

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