Crossroads of Volatility Spillover: Interactions between Islamic and Conventional Financial Systems

Abstract

This study investigates the volatility spillover in dual financial systems, namely Islamic financial systems (banking and insurance) and conventional financial systems (banking and insurance). Employing an information risk spillover network, we are able to explore information flow between conventional and Islamic banking and insurance systems. We analyse their role in transmitting spillover risk, showing that capturing spillovers of both sectors provides a more comprehensive perspective on financial risk contagion.  Our results show that spillovers form as intersectoral clusters affected by their own volatility rather than by the volatility of another financial system. Moreover, we find an asymmetric spillover effect between the conventional and Islamic systems. The conventional sector tends to dominate spillover effects, while the Islamic sector benefits from them. Our results are important for regulators and investors, aiding in better global risk assessment.

Keywords: Islamic banking and insurance, Conventional banking and insurance, Cross market, Volatility, spillover effect