Are the Islamic and conventional money markets really highly correlated ? MGARCH-DCC and Wavelet approaches

Bai Chen and Abul Masih

MPRA Paper from University Library of Munich, Germany

Abstract: Criticisms of Islamic banks and financial products motivate us to re-examine whether the profit rate of Islamic financial products and conventional interest rate are highly related or not. It is well known that interest rate is highly influenced by the economic policies, so, in this research we will check the relation between several rates (Islamic and conventional) of return and economic policy uncertainty index respectively to make a judgement on the criticisms. We applied MGARCH-DCC and Continuous Wavelet Transform analyses to see the relations of these variables among different time scales with data collected from different sources. Unlike previous studies, economic policy is incorporated in the analyses in order to explain the issue. Our results tend to indicate that the Islamic profit- and- loss sharing (PLS) rates have divergent relations with interest rates. Islamic Murabahah profit rate is less correlated with LIBOR, while Islamic Mudarabah profit rate is highly correlated with LIBOR. That shows both the uniqueness and similarity of Islamic financial products with the conventional interest rate. Hence the policy makers, if they intend to, can make Islamic money market more independent of the influence of conventional market.

Keywords: MGARCH; Wavelet; PLS; Islamic profit rate; Murabahah; Mudarabah; LIBOR (search for similar items in EconPapers)
JEL-codes: C58 E44 G11 G15 (search for similar items in EconPapers)
Date: 2017-06-12
New Economics Papers: this item is included in nep-mac and nep-mon
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