Contagion between Islamic and Conventional Banking: A GJR DCC-GARCH and VAR Analysis

Mohamed Amin Chakroun and Mohamed Gallali

International Business Research, 2016, vol. 9, issue 10, 115-126

Abstract: This study aims testing the presence of contagion through Islamic and conventional banking systems during the subprime crisis. Specifically, we examine how far a shock striking conventional or Islamic banks is exported from one group to another or remain limited. Therefore, we adopt a GJR DCC-GARCH model to study the dynamic conditional correlation and the vector auto-regression VAR model in order to identify causality direction and the impact of a shock on the returns of each banking index. Hence, our results indicate that Islamic banks are not isolated from conventional banks while there is a contagion phenomenon between these two financial systems. Furthermore, we determined that during the crisis, Islamic banks could not absorb this effects and ensure stability because these banks were also affected by the crisis.

Keywords: This study aims testing the presence of contagion through Islamic and conventional banking systems during the subprime crisis. Specifically; we examine how far a shock striking conventional or Islamic banks is exported from one group to another or remain limited. Therefore; we adopt a GJR DCC-GARCH model to study the dynamic conditional correlation and the vector auto-regression VAR model in order to identify causality direction and the impact of a shock on the returns of each banking index. Hence; our results indicate that Islamic banks are not isolated from conventional banks while there is a contagion phenomenon between these two financial systems. Furthermore; we determined that during the crisis; Islamic banks could not absorb this effects and ensure stability because these banks were also affected by the crisis. (search for similar items in EconPapers)
JEL-codes: G21 G32 G33 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:ibn:ibrjnl:v:9:y:2016:i:10:p:115-126

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