Return volatilities and contagion transmission between Islamic and conventional banks throughout the subprime crisis: evidence from the DCC-MGARCH model

The financial markets' deregulation and globalisation have highlighted the banking systems' fragility in the presence of financial crises. Indeed, both conventional and Islamic banks have been affected by the recently witnessed international financial crisis. In this context, an attempt has been undertaken throughout the present work in a bid to test whether the Islamic banking return volatilities undergone during the last financial crisis might have its explanations in the contagion effect. For this purpose, the DCC-MGARCH model has been applied to estimate the conditional dynamic correlations prevailing between Islamic and conventional banking returns. Using a test of Van Royen, the results have shown that these correlations between the returns of both bank types have increased between the quiet period and the crisis period. This finding implies that contagion has been a major source of the decline witnessed in the Islamic banks' returns.