Islamic and conventional equity markets: Two sides of the same coin, or not?

This study undertakes an empirical analysis of both mean and variance dynamics between the MSCI ACWI Islamic stock index on the one hand and three conventional counterparts for the US, developed, and GCC markets on the other. The investigation is carried out in the context of the modified cross-correlation function testing procedure of Hong (2001), after filtering out the effect of a diverse set of global influences and risk factors and accounting for regime shifts in the conditional second moment dynamics. The empirical evidence reveals the presence of substantial mean and volatility spillovers radiating from the mainstream stock market indices to their Sharia-compliant counterpart, with the opposite direction being largely negated. The findings invalidate the dichotomous distinction between conventional and Islamic stock markets. Practical implications for investors and portfolio managers are drawn from the results.