Information transmission between Islamic stock indices in South East Asia

Purpose - The purpose of this paper is to investigate the transmission of information (at return and volatility level) as well as the correlation between Kuala Lumpur Syariah and Jakarta Islamic Indices. Design/methodology/approach - The daily return from July 4, 2000 to December 29, 2006 was employed in the bivariate VAR GJR‐GARCH model. Findings - The results indicate significant unidirectional return and volatility transmissions from Kuala Lumpur Syariah and the Jakarta Islamic Indices. There is no evidence of asymmetric effects in volatility for both markets. However, volatility is highly persistent and mean‐reverting in each market. The findings also revealed that there is low correlation between the two Islamic stock markets investigated. Research limitations/implications - The data used in this study are limited to the Islamic stock markets located in South East Asia, concentrating more on the post‐economic crisis period analysis. Further research may be conducted using a different time period and frequency of data while utilizing more Islamic indices. In addition, future research may look at and compare the market interdependence of Islamic stock markets in different economic conditions such as the pre‐economic crisis period, during an economic crisis period or post‐economic crisis period. Practical implications - Market participants such as investors and market analysts should include the Malaysian Islamic stock market in forecasting market price movement and the volatility of the Indonesian Islamic stock market. In addition, both the Kuala Lumpur Syariah and Jakarta Islamic Indices offer potential for diversification to investors who wish to create an Islamic portfolio investment. From the regulator point of view, this study highlighted the fact that the Jakarta Stock Exchange should consider the Malaysian Islamic stock market in setting its policy to control the volatility of the Indonesian Islamic stock market because the source of volatility in Indonesian market is not only from the market itself, but also from the Malaysian market. On the other hand, in controlling the volatility of the Islamic Malaysian market, Bursa Malaysia should only implement a policy related to the Malaysian market because the source of volatility only comes from the local markets. Finally, the policy makers in both markets do not need to implement long‐range measures to reduce the impact of volatility persistence in these markets. Originality/value - This is the first paper to investigate information transmission and market interdependence between the Islamic stock markets in South East Asia.