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Common shocks, common transmission mechanisms and time-varying connectedness among Dow Jones Islamic stock market indices and global risk factors

Hedi Ben Haddad, Imed Mezghani and Mohammed Al Dohaiman

Economic Systems, 2020, vol. 44, issue 2

Abstract: The purpose of this paper is twofold. First, we examine the importance of permanent versus transitory shocks as well as their domestic and foreign components in explaining the business cycle fluctuations of seven Dow Jones Islamic stock markets (DJIM), namely U.S., U.K., Canada, Europe, Asia-Pacific, Japan and GCC, over the period from April 2003 to November 2018, using the permanent-transitory (P-T) decompositions approach of Centoni et al. (2007). Second, we investigate the spillover mechanisms of these shocks across Islamic stock markets and a set of global risk factors, using the Diebold and Yilmaz (DY) (2012) approach. The P-T decomposition results show that the DJIM U.S., U.K., Europe and GCC indices are sensitive to both domestic and foreign shocks, while the DJIM Canada, Japan and Asia-Pacific are most sensitive to domestic shocks. The empirical results of the DY approach indicate that: (i) the return and volatility spillover intensity increase during financial turmoil, supporting evidence of the contagion phenomenon, (ii) the DJIM U.S. is the main transmitter of return and volatility spillovers, while the DJIM GCC is identified as the main receiver of both return and volatility spillovers, (iii) the seven Dow Jones Islamic stock indices are weakly linked to movements of global risk factors, and (iv) there is evidence of possible portfolio diversification between the selected Islamic stock markets and the oil commodity market.

Keywords: Dow Jones Islamic equity index; Return and volatility spillovers; Global financial crisis; European debt crisis; Global risk factors; Permanent-transitory decomposition; Serial correlation common features (search for similar items in EconPapers)
JEL-codes: C11 C15 C32 G1 G14 G15 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.ecosys.2020.100760

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