Decoupling hypothesis of Islamic stocks: Evidence from copula CoVaR approach

Muhammad Usman · Rafi Amir‐ud‐Din · Waheed Akhter

40 citations0/0 files storedBorsa Istanbul Review

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Islamic Finance and Banking Studies Financial Risk and Volatility Modeling Market Dynamics and Volatility

Abstract

This paper studies the dependence structure between Islamic and conventional stocks in five countries (USA, UK, Japan, Malaysia and Pakistan) using the copula CoVaR approach for the period 2004–2016. Results from the copula models show that, for four countries, the Islamic stocks are upper tail dependent and lower tail independent with conventional stocks. While for one country, Islamic stocks are lower tail dependent with the conventional stocks without having upper dependence. We also find that dependence structure between Islamic and conventional stocks is time varying for all the countries. We also estimate the CoVaR for conventional stocks conditional on Islamic stocks being at their VaR. The results show the diversification benefits of the Islamic stocks and investors can use Islamic finance instruments for hedging. We then test for the asymmetry of upside and downside risks and find that there is an asymmetry between upside and downside risks.

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References

2008Islamic Banks and Financial Stability 2013Risk in Islamic Banking 2013Performance of global Islamic versus conventional share indices: International evidence 2013Do Islamic stock indexes outperform conventional stock indexes? A stochastic dominance approach 2013How strong are the causal relationships between Islamic stock markets and conventional financial systems? Evidence from linear and nonlinear tests 2013Conventional and Islamic stock price performance: An empirical investigation 2005Ethical Investment Revisited 2014Dynamic dependence of the global Islamic equity index with global conventional equity market indices and risk factors

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