On the role of structural breaks in identifying the dynamic conditional linkages between stock and commodity markets

Tarek Chebbi and Abdelkader Derbali

Journal of Energy Markets

Abstract: ABSTRACT As the nexus between Islamic financial market indexes and energy commodities becomes more global, the question of whether any specific shock considerations are still relevant that might affect this relationship arises. In order to answer it, our paper examines this question by testing the dynamic conditional correlation (DCC) betwee the Qatar Exchange Al Rayan Islamic Index and two energy commodities (crude oil and natural gas) by including structural breaks in the DCC-generalized autoregressive conditional heteroscedasticity (GARCH) model, as introduced by Engle in "Dynamic conditional correlation: a simple class of multivariate GARCH models" (2002), over the period from March 15, 2011 to December 25, 2014. Our findings reveal that the volatility of commodity returns is strongly correlated to that of the Al Rayan Islamic Index, and the volatility persistence decreases by its lowest amount after incorporating structural breaks. Interesting implications emerge from this paper for both policy makers and portfolio risk managers.

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