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Volatility Transmission between Islamic and Conventional Equity Markets: Evidence from Causality-in-Variance Test

Saban Nazlioglu (), Shawkat Hammoudeh and Rangan Gupta ()

No 201384, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper examines whether a volatility/risk transmission exists between the Dow Jones Islamic stock and three conventional stock markets for the U.S., Europe, and Asia during the pre- and the in- and post-2008 crisis periods. It also explores the volatility spillover dynamics between those markets and U.S. Monetary policy, oil prices, global financial risk and uncertainty factors. The recently developed Hafner and Herwartz (2006)’s causality-in-variance test provides evidence of risk transfers between these seemingly different equity markets, indicating a contagion between them. The volatility structure of these markets is dominated by short-run volatility in the first period and by high long-run volatility in the second period. The volatility impulse response analysis indicates a similar volatility transmission pattern although it is characterized by a more volatile and short-lived structure in the second period. It also appears that the Islamic equity market responds to shocks from risk factors and not from the oil price and the U.S. economic policy uncertainty index during both periods.

Keywords: Islamic and conventional equity markets; volatility spillover (search for similar items in EconPapers)
JEL-codes: C32 C58 G1 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2013-12
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