Are Islamic Equity Markets “Safe Havens”? Exploring the Contagion Effects Between Metal Future Markets and Malaysian Islamic Bonds Using DCC-FIGARCH During the Recent Global Financial Crisis of 2008

Konstantinos Tsiaras

doi:10.31436/ijema.v29i2.934

Authors

Konstantinos Tsiaras University of Ioannina, Greece

DOI:

https://doi.org/10.31436/ijema.v29i2.934

Keywords:

DCC-FIGARCH, Metal futures, Sukuk, Financial contagion, Islamic finance

Abstract

This paper examines the time-varying conditional correlations between seventeen metal future markets and Malaysian Islamic bonds. We apply twelve sixvariate dynamic conditional correlation (DCC) FIGARCH models in order to capture potential contagion effects between the markets for the period 2007-2011. Empirical results reveal contagion during the under investigation period regarding the twelve sixvariate models, showing potential volatility transmission channels among the markets and implying that the sukuk bonds are not a safe haven during bearish times without portfolio diversification strategies. Findings have crucial implications for policymakers who provide regulations for the above derivative markets and for investors who invest long-term in Islamic bonds.

References

Abdullah, A.M., B. Saiti, and M. Masih. “The impact of Crude Oil Price on Islamic Stock Indices of South East Asian countries: Evidence from MGARCH-DCC and Wavelet Approaches.” Borsa Istanbul Review 16 (2016): 219-32.

Ahmed, M. Z., and A.H. Elsayed. “Are Islamic and Conventional Capital Markets Decoupled? Evidence from Stock and Bonds/Sukuk Markets in Malaysia.” The Quarterly Review of Economics and Finance 74 (2019): 56-66.

Aloui, C., S. Hammoudeh, and H.B. Hamida. “Co-movement between Sharia Stocks and Sukuk in the GCC markets: A Time-frequency Analysis. “Journal of International Financial Markets, Institutions & Money 34 (2015): 69-79.

Andersson, M., E. Krylova, and S. Vähämaa. “Why Does the Correlation between Stock and Bond Returns Vary Over Time?” Applied Financial Economics 18 (2008): 139-51.

Baillie, R.T., T. Bollerslev, and H.O. Mikkelsen. “Fractionally Integrated Generalized Autoregressive Conditional Heteroskedasticity.” Journal of Econometrics 74, no. 1 (1996): 3-30.

Dickey, D.A., and W.A. Fuller. “Distribution of the Estimators for Autoregressive Time Series with a Unit Root.” Journal of the American Statistical Association 74 (1979): 427-31.

Engle, R.F. “Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models.” Journal of Business and Economic Statistics 20 (2002): 339-50.

Erdogan, S., A. Gedikli, and E.I. Cevik. “Volatility Spillover Effects Between Islamic Stock Markets and Exchange Rates: Evidence from Three Emerging Countries.” Borsa Istanbul Review 4 (2018): 322-33.

Forbes, K.J., and R. Rigobon. “No Contagion, Only Interdependence: Measuring Stock Market Comovements.” The Journal of Finance 57, no. 5 (2002): 2223-61.

Gupta, R., and H.A. Marfatia. “Geopolitical Risks and Movements in Islamic Bond and Equity Markets: A Note.” Defence and Peace Economics 30 (2019): 367-79.

Hosking, J.R.M. “The Multivariate Portmanteau Statistic.” Journal of the American Statistical Association 75, no. 371 (1980): 602-8.

Hassan, K., A. Hoque, and D. Gasbarro. “Separating BRIC using Islamic Stocks and Crude Oil: Dynamic Conditional Correlation and Volatility Spillover Analysis.” Energy Economics 80 (2019): 950-69.

Karim, B.A., N.A.M. Kassim, and M.A. Arip. “The Subprime Crisis and Islamic Stock Markets Integration.” International Journal of Islamic and Middle Eastern Finance and Management 3 (2010): 363-71.

McLeod, A.I., and W.K. Li. “Diagnostic Checking ARMA Time Series Models using Squared-Residuals Autocorrelations.” Journal of Time Series Analysis 4, no. 4 (1983): 269-73.

Mensi, W., S. Hammoudeh, and S.H. Kang. “Precious Metals, Cereal, Oil and Stock Market Linkages and Portfolio Risk Management: Evidence from Saudi Arabia.” Economic Modelling 51 (2015a): 340–58.

______, S. Hammoudeh, J.C. Reboredo, and D.K. Nguyen. “Are Sharia stocks, gold and U.S. Treasury hedges and/or safe havens for the oil-based GCC markets?” Emerging Markets Review 24 (2015b): 101–21.

Metadjer, W., S.E. Benbakhti, and H. Boulila. “Diagnostic of Innovations and Volatility Persistence in Emerging Markets. Evidence from Sukuk and Stock Indices.” International Journal of Islamic Business and Economics 4 (2020): 95-105.

Mosaid, F., and R. Boutti. “Sukuk and Bond Performance in Malaysia.” International Journal of Economics and Finance 6 (2014): 226-34.

Nagayev, R., M. Disli, K. Inghelbrecht, and A. Ng. “On the Dynamic Links between Commodities and Islamic Equity.” Energy Economics 58 (2016): 125–40.

Narayan, P.K., and D.H.B. Phan. “A survey of Islamic Banking and Finance Literature: Issues, Challenges and Future Directions.” Pacific-Basin Finance Journal 53 (2019): 484–96.

Rusgianto, S., and N. Ahmad. “Volatility Behavior of Sukuk Market: An Empirical Analysis of the Dow Jones Citigroup Sukuk Index.” Middle East Journal of Scientific Research 13 (2013): 93-7.

Saiti, B., O.I. Bacha, and M. Masih. “The Diversification Benefits from Islamic Investment During the Financial Turmoil: The Case for the US-based Equity Investors.” Borsa Istanbul Review 14 (2014): 196- 211.

Shahzad, S.J.H., W. Mensi, S. Hammoudeh, M.U. Rehman, and K.H. Al-Yahyaee. “Extreme Dependence and Risk Spillovers between Oil and Islamic Stock Markets.” Emerging Markets Review 34 (2018a): 42–63.

______, C. Aloui, R. Jammazi, and M. Shahbaz. “Are Islamic Bonds a Good Safe Haven for Stocks? Implications For Portfolio Management in a Time-Varying Regime-Switching Copula Framework.” Applied Economics 51 (2018b): 219-38.

Trabelsi, N. “Dynamic and Frequency Connectedness Across Islamic Stock Indexes, Bonds, Crude Oil and Gold.” International Journal of Islamic and Middle Eastern Finance and Management 12 (2019): 306-21.

Umar, Z. “Islamic vs Conventional Equities in a Strategic Asset Allocation Framework.” Pacific Basin Finance Journal 42 (2017): 1–10.

Zin, M.Z.M., A.A. Sakat, N.A. Ahmad, M. Roslan, M. Nor, A. Bhari, S. Ishak, and M.S. Jamain. “The Effectiveness of Sukuk in Islamic Finance Market.” Australian Journal of Basic and Applied Sciences 5 (2011): 472-78.