Oil crisis vs pandemic: a broader outlook of time-frequency volatility transmission between Islamic and conventional stock markets

Abstract

This study explores volatility spillovers and financial connectedness between conventional and Islamic equity stock markets in developed, emerging, and frontier economies. Four regions– Gulf Cooperation Council (GCC), South Asian Association for Regional Cooperation (SAARC), Brazil, Russia, India, and China (BRIC), and Group of Seven (G7)–were selected for this study following the Diebold and Yilmaz (DY-12) and Baruník and Krehlík (BK-18) spillover methods. Daily data from 01 January 2012 to December 31, 2021, were sourced from the Eikon Refinitiv data stream. The results showed that the COVID-19 crisis was lethal compared to the oil crisis of 2014–15. These results suggest that Islamic stock markets are highly interconnected in terms of overall returns. For conventional stocks, the USA stock market largely serves as the top transmitter of returns and volatility. However, for Islamic stocks, France and the USA found to be the top transmitter and receiver of the shock, respectively. Together with these findings, we found that the DY-12 approach could replicate the frequency-domain connectivity measurements of BK-18. Our findings have significant implications for investors, regulators, and policymakers.

Keywords

• Stock market return
• volatility
• financial connectedness
• Islamic Index
• Pandemic
• David McMillan, University of Stirling, United Kingdom of Great Britain and Northern Ireland