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Are Islamic indexes a safe haven for investors? An analysis of total, directional and net volatility spillovers between conventional and Islamic indexes and importance of crisis periods

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  • Hkiri, Besma
  • Hammoudeh, Shawkat
  • Aloui, Chaker
  • Yarovaya, Larisa

Abstract

We examine the decoupling and contagion hypotheses by testing them on the safe haven status of Islamic indexes through investigating the total, directional and net volatility spillovers across nine regional Islamic stock indexes and their conventional counterparts, using the generalized vector autoregressive framework. We use daily data covering the period 1999 to 2014 which includes various financial crises such as those that took place in Asia, Russia, Argentina, Brazil and the United States. The results show that global financial crises strongly affect the cross-market volatility. Although the contagion hypothesis is evident for both Islamic and conventional indexes, the findings also suggest the presence of a decoupling of the Islamic indexes from their conventional counterparts during turbulent periods. The results provide several useful implications for policy makers and portfolio managers seeking to diversify their portfolios and to hedge market risk, confirming that the Islamic financial indexes are a safe haven for investors during financial crises. Furthermore, paper reports significant time-varying patterns in the volatility spillovers for all the Islamic and conventional stock indexes and points out the stress transmitters and receivers.

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  • Hkiri, Besma & Hammoudeh, Shawkat & Aloui, Chaker & Yarovaya, Larisa, 2017. "Are Islamic indexes a safe haven for investors? An analysis of total, directional and net volatility spillovers between conventional and Islamic indexes and importance of crisis periods," Pacific-Basin Finance Journal, Elsevier, vol. 43(C), pages 124-150.
  • Handle: RePEc:eee:pacfin:v:43:y:2017:i:c:p:124-150
    DOI: 10.1016/j.pacfin.2017.03.001
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    2. Ahmed, Walid M.A., 2019. "Islamic and conventional equity markets: Two sides of the same coin, or not?," The Quarterly Review of Economics and Finance, Elsevier, vol. 72(C), pages 191-205.
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    More about this item

    Keywords

    Islamic indexes; Conventional indexes; Volatility spillovers; Vector autoregression; Safe haven;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G1 - Financial Economics - - General Financial Markets

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