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Time-varying correlation between islamic stock indices: evidence from the GCC countries based on MGARCH-DCC approach

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  • Yousef, Mona
  • Masih, Mansur

Abstract

The paper makes an attempt to investigate the portfolio diversification opportunities available within the Islamic stock indices in the GCC countries. That requires the estimation of the time-varying variances of and covariances between the daily returns of the GCC Islamic stock indices. Hence the method used is the recent multivariate GARCH-DCC which takes care of their time-varying relationships. The findings tend to indicate that the unconditional volatility of the GCC stock returns are very low which may indicate that the reruns are stable and the risk is very low. However, the VaR estimator shows that the risk was rising dramatically since 2011, probably due to the political instability during this period. The time-varying conditional correlation between the stock returns of these countries appears to be low in general which provides an advantage to the investors interested in investing in the GCC financial markets. That means it provides more stable returns with low correlation between the stock returns and thus less risky. The results also indicate lower level of integration between the GCC stock markets.

Suggested Citation

  • Yousef, Mona & Masih, Mansur, 2017. "Time-varying correlation between islamic stock indices: evidence from the GCC countries based on MGARCH-DCC approach," MPRA Paper 100986, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:100986
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    File URL: https://mpra.ub.uni-muenchen.de/100986/1/MPRA_paper_100986.pdf
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    References listed on IDEAS

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    5. M. Hashem Pesaran & Bahram Pesaran, 2007. "Volatilities and Conditional Correlations in Futures Markets with a Multivariate t Distribution," CESifo Working Paper Series 2056, CESifo.
    6. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
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    Cited by:

    1. Ngo Thai Hung, 2021. "Financial connectedness of GCC emerging stock markets," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 11(4), pages 753-773, December.

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    More about this item

    Keywords

    Islamic stock indices; GCC; time-varying correlation; MGARCH-DCC;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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