Regime-dependent relation between Islamic and conventional financial markets

Emrah İsmail Çevik · Mehmet Fatih Buğan

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Islamic Finance and Banking Studies Financial Markets and Investment Strategies Market Dynamics and Volatility

Abstract

The aim of this paper is to examine regime-dependent dynamic relation between Islamic and conventional financial markets by means of Markov Switching Vector Autoregression (MS-VAR). Empirical results suggest evidence in favor of regime-switching properties in all returns series. These findings provide strong evidence in favor of nonlinear relation between the conventional and Islamic stock markets and thus, it is necessary to employ the MS-VAR models to determine the dynamic relationship between series. The regime-dependent Granger causality test and impulse-responses analysis results suggest that Islamic stock market is affected from conventional stock markets in both the bear and bull markets regimes. Therefore, the idea that Islamic financial markets provide diversification benefits and they are safe havens during financial distressed periods cannot be supported empirically.

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References

1989A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle 1997Markov-Switching Vector Autoregressions: Modelling, Statistical Inference, and Application to Business Cycle Analysis 1996Erratum: The likelihood ratio test under nonstandard conditions: Testing the Markov switching model of GNP 1992The likelihood ratio test under nonstandard conditions: Testing the markov switching model of gnp 1997Regime switching in stock market returns 2011Risk and return characteristics of Islamic equity funds 2013Performance of global Islamic versus conventional share indices: International evidence 2013Do Islamic stock indexes outperform conventional stock indexes? A stochastic dominance approach

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