Geopolitical Risk and Stock-Bond Interplay: A Comparative Study of Islamic and Conventional Assets in the GCC

Chaker Aloui, Lama Al-Kayed, Alam Asadov and Nevi Danila

Defence and Peace Economics, 2024, vol. 35, issue 6, 740-759

Abstract: Undoubtedly, financial markets are not only affected by common economic, financial and behavioral factors but also by other global risk shocks. In this paper, we investigate the relevance of global geopolitical risk in stock-bond relationships. Specifically, we assess the possibility and manner in which time-varying correlations of Islamic stocks and bonds (sukuk) returns are affected by geopolitical risk and whether they behave differently from their conventional counterparts. We do so by implementing a multivariate GARCH model under dynamic conditional correlations (DCCs) to daily data of the Gulf Cooperation Council (GCC) markets (2013-2019). Our outcomes unveil that geopolitical risks positively affect the dependence between Islamic stocks and sukuk, as well as their conventional counterparts. Regional rather than global geopolitical risk factors positively affect the volatility of conventional stock-bond correlation, while the volatility of Islamic stock-sukuk correlation decreases during times of high geopolitical risks. Our findings offer several prominent implications in terms of financial stability, asset allocation of portfolios and policy design.

Date: 2024
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DOI: 10.1080/10242694.2023.2203477

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