Dynamic Shock-Transmission Mechanism Between U.S. Trade Policy Uncertainty and Sharia-Compliant Stock Market Volatility of GCC Economies

Mosab I. Tabash (), Suzan Sameer Issa, Marwan Mansour, Mohammed W. A. Saleh, Maha Rahrouh, Kholoud AlQeisi and Mujeeb Saif Mohsen Al-Absy
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Mosab I. Tabash: Department of Business Administration, College of Business, Al Ain University, Al Ain P.O. Box 64141, United Arab Emirates
Suzan Sameer Issa: Faculty of Administrative and Financial Sciences, University of Petra, Amman P.O. Box 961343, Jordan
Marwan Mansour: Jadara Research Center, Jadara University, Irbid 21110, Jordan
Mohammed W. A. Saleh: Department of Accounting and Auditing, Palestine Technical University-Kadoorie, Tulkarm P.O. Box 7, Palestine
Maha Rahrouh: Department of Business Administration, College of Business, Al Ain University, Al Ain P.O. Box 64141, United Arab Emirates
Kholoud AlQeisi: Department of Business Administration, College of Business, Al Ain University, Al Ain P.O. Box 64141, United Arab Emirates
Mujeeb Saif Mohsen Al-Absy: Accounting and Financial Science Department, College of Administrative and Financial Science, Gulf University, Sanad 26489, Bahrain

Risks, 2025, vol. 13, issue 3, 1-59

Abstract: This study endeavors to explore the shock-transmission mechanism between Trade Policy Uncertainty (TPU) and the volatility inherent in the Gulf Cooperation Council (GCC) Islamic stock markets by employing the novel Quantile Vector Auto Regression (QVAR) with “Extended Joint” and “Frequency” domain connectedness technique. Overall findings indicated a U-shaped pattern in the shock-transmission mechanism with the higher TPU shocks transmitted towards Islamic stock market volatility at the extreme quantiles and in the long term. The “Extended Joint” QVAR connectedness approach highlights that, in bearish and moderate-volatility conditions ( τ = 0.05, 0.50), diversifying portfolios across less shock-prone equity markets like Qatar and UAE can mitigate risk exposure to TPU shocks. Specific economies receiving higher TPU shocks, like Bahrain, Kuwait, and Saudi Arabia, should implement strategic frameworks, including trade credit insurance and currency hedging, for risk reduction in trade policy shocks during the bearish and moderate-volatility conditions. Conversely, Qatar and Kuwait show the least transmission of error variance from TPU during higher-volatility conditions ( τ = 0.95). Moreover, the application of the Frequency-domain QVAR technique underscores the need for short-term speculators to exercise increased vigilance during bearish and bullish volatile periods, as TPU shocks can exert a more substantial influence on the Islamic equity market volatility of Bahrain, Oman, Kuwait, and Saudi Arabia. Long-term investors may need to tailor their asset-allocation strategies by increasing allocations to more stable assets that are less susceptible to TPU shocks, such as Qatar, during bearish ( τ = 0.05), moderate ( τ = 0.50), and bullish ( τ = 0.95) volatility.

Keywords: Quantile-based Vector Auto Regression (QVAR); Trade Policy Uncertainty (TPU); Islamic financial markets; Frequency-domain QVAR connectedness; Gulf Cooperation Council (GCC) Islamic stock markets (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2025
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