Dynamic connectedness and spillovers between Islamic and conventional stock markets: time- and frequency-domain approach in COVID-19 era

Ahmed Bossman; Peterson Owusu Junior; Aviral Kumar Tiwari

doi:10.1016/j.heliyon.2022.e09215

Dynamic connectedness and spillovers between Islamic and conventional stock markets: time- and frequency-domain approach in COVID-19 era

Heliyon. 2022 Mar 31;8(4):e09215. doi: 10.1016/j.heliyon.2022.e09215. eCollection 2022 Apr.

Authors

Ahmed Bossman¹, Peterson Owusu Junior¹, Aviral Kumar Tiwari²

Affiliations

¹ Department of Finance, School of Business, University of Cape Coast, Cape Coast, Ghana.
² Rajagiri Business School, Rajagiri Valley Campus, Kochi, India.

Abstract

This study investigates the dynamic connectedness and spillovers between Islamic and conventional stock markets to reveal the time- and frequency-domain dynamics of the two asset classes under various market conditions. Using the spillover index of Baruník and Křehlík (2018), supplemented by the time-varying parameter vector autoregressions (TVP-VAR) connectedness model, we employ daily stock market indices for Islamic and conventional (G7) markets from November 23, 2015, to September 8, 2021. The findings explicate that the volatility spillovers across and within Islamic and/or G7 markets are time-varying and frequency-dependent but during market turbulences, the conventional stocks are prone to more volatilities than the Islamic stocks. Our findings additionally divulge contagious spillovers among Islamic and conventional stocks during Brexit and the studied COVID-19 period. Relative to mid-and long-term spillovers, we underscore the supremacy of short-term spillovers between Islamic and G7 markets. In turbulent trading periods, investors should utilise knowledge about market patterns and volatility to hedge their positions against lower stock returns, when spillover is more intense. Regulators should pay close attention to spillovers since they undermine cross-market connections. Intriguing findings and their implications are further discussed.

Keywords: COVID-19 pandemic; Contagion; Conventional stock markets; Dynamic connectedness; Islamic stock markets; Time- and frequency-domain; Volatility spillovers.