Intensity of Volatility Linkages in Islamic and Conventional Markets
61 Pages Posted: 27 Jan 2017
Date Written: December 29, 2016
Characteristics of Islamic finance, such as a smaller set of shared information and a lower degree of cross-market hedging, reduce volatility linkages (correlations) between Islamic and conventional stocks, bonds and bills. We use a stochastic volatility model in a Generalized Methods of Moments framework as well as other volatility proxies to estimate volatility linkages. We are the first to document that including at least one Islamic asset lowers volatility linkages by up to 7.17 percentage points, after controlling for country and asset-specific characteristics. Results are stronger during financial crises and are not driven by the oil sector.
Keywords: Volatility Correlations, International Markets, Contagion, Stochastic Volatility, Islamic Finance
JEL Classification: G1
Suggested Citation: Suggested Citation