Comovement between crude oil prices and shariah stock indices: MGARCH-DCC and wavelet analysis

Halim, Abdul and Masih, Mansur (2017): Comovement between crude oil prices and shariah stock indices: MGARCH-DCC and wavelet analysis.

Abstract

This paper tries to answer the following two questions: (1) Should the Shariah Investors invest in USA, European or Emerging markets to gain international portfolio diversification benefits with respect to the oil price shocks? From our analysis using MGARCH-DCC method, we can see that the conditional volatilities of all shariah index returns tend to move more or less simultaneously except during the 2008 global financial crisis when there seems to be high convergence of volatility among shariah stock index returns of oil price, emerging market index and Shariah 350 European index during the period of the 2008 crisis and earlier part of 2016 being another shock in oil prices. Results from the conditional correlations show that the Shariah 500 index having the lowest unconditional correlations with respect to the oil price. It can be suggested that investors are better off investing in US shariah stock markets to gain more portfolio diversification compared to other shariah stock markets of the major trading partners. (2) how would the international portfolio diversification strategy change given different investor stock holding periods (e.g. 2-4 Days, 4-8 Days, 8-16 Days, and so on). The MODWT result shows that for the time scale as 16-32 days, 128-256 days and 256-512 days, the correlations are strong which as the number shows more than 0.6. The correlation results between crude oil prices and S&P Shariah 500 are moderately correlated as most of correlations are in the range of 0.44 to 0.60. However, correlations between crude oil and S&P Shariah 350 index having the highest correlations with 0.90790415 at the scale of 256-512 days. It shows that there is a significant comovement between the crude oil prices and shariah stock markets implying relatively low portfolio diversification opportunities.

• Item Type: MPRA Paper
• Language: English
• Keywords: Shariah stock prices, crude oil prices, portfolio diversification, MGARCH, Wavelets
• 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; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

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