The Impact of Crude Oil Price on Islamic Stock Indices of South East Asian (SEA) Countries: A Comparative Analysis

Ahmad Monir Abdullah, Buerhan Saiti and Abul Masih
Authors registered in the RePEc Author Service: Burhan Uluyol

MPRA Paper from University Library of Munich, Germany

Abstract: An understanding of how volatilities of and correlations between commodity returns and Islamic stock indices change over time including their directions and size are of crucial importance for both the domestic and international investors with a view to diversifying their portfolios for hedging against unforeseen risks. This paper is the first attempt to add value to the existing literature by empirically testing for the ‘time-varying’ and ‘scale dependent’ volatilities of and correlations between the selected Islamic stock indices of South East Asian countries and selected commodities for enhancing portfolio diversification benefits. The methodologies appropriate to achieving the objectives were the recently introduced dynamic conditional correlations and wavelet decompositions. Our findings tend to suggest that there is a theoretical relationship between the selected Islamic stock indices and the selected commodities and that the Islamic stock indices of Singapore, Philippines and Indonesia are leading the other Islamic stock indices and the commodities (as evidenced in the Vector Error-Correction models). Consistent with these results, our analysis based on the application of the recent wavelet technique MODWT tends to indicate that the Singapore Islamic index is leading the other Islamic indices and the commodities. From the point of view of portfolio diversification benefits based on the extent of dynamic correlations between variables, our results tend to suggest that an investor should be aware that the Philippine Islamic stock index is less correlated with the crude oil in the short run (as evidenced in the continuous wavelet transform analysis) and that an investor holding the crude oil can gain by including the Malaysian Islamic stock index in his/her portfolio (as evidenced in the Dynamic conditional correlations analysis).

Keywords: Commodity; Islamic Stock Index Returns (ISIR); MODWT; CWT; DCC-MGARCH; Diversification; Causality (search for similar items in EconPapers)
JEL-codes: C58 Q43 (search for similar items in EconPapers)
Date: 2014-06-28
New Economics Papers: this item is included in nep-ene, nep-rmg and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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