Connectedness in GCC Markets: Comparison between Islamic and Conventional Stock Markets

Abstract

This paper explores the dynamic connectedness between Islamic and conventional stock markets of GCC economies and the impact of the global financial uncertainties’ measures on their connectedness. By employing the time-varying parameter vector autoregressions (TVP-VAR) technique and using daily data spanning from 12/01/2008 to 07/14/2021, the study finds strong interconnectivity within the country between Islamic and conventional stock markets. Similarly, during the crisis periods, the connectedness became stronger in the case of both markets, i.e., Islamic, and conventional, and vice versa. The study also observes that Islamic stock markets are more recipients of spillovers than conventional stocks. Furthermore, the UAE and KSA stock markets are net transmitters of spillovers, while Oman, Bahrain, and Kuwait receive more spillovers than they transmit. Finally, the study also demonstrates that global financial uncertainties’ measures (GVZ, USEPU, UKEPU) drive the connectedness of financial markets positively and EVZ impact negatively while VIX and OVX remain insignificant. The study suggests that the investors and portfolio managers of Oman, Bahrain, and Kuwait also need to carefully assess the UAE and KSA markets before making investment decisions as these two countries are the net transmitters in the region. Finally, the investors must be aware that Islamic and conventional stocks cannot be used as an alternative asset class to hedge risk.

Keywords: Connectedness, Islamic stock, Conventional stock, TVP-VAR, GCC