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Correlation between Islamic stock and Commodity markets: An investigation into the impact of financial crisis and financialization of commodity markets

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  • Khan, Aftab
  • Masih, Mansur

Abstract

The repercussions of the recent financial crisis were felt over different parts of the world causing much calamity to different markets, economies and investors. The capital markets, in particular, took a severe hit during the crisis plummeting to all-time lows. However, before the crisis, the significant rise in commodity prices since 2002 and their subsequent fall since July 2008 have revived the debate on the role of commodities in the strategic and tactical asset allocation process. Therefore, the understanding of relationship between commodities and stock markets is crucial, especially during the crisis, when investors are looking for alternative investment opportunities. In this paper, we focus on commodity markets and their relation with Islamic stock markets during the recent financial crisis. This is the first attempt to study this relationship in the important and growing area of Islamic capital markets with the help of the recent dynamic conditional correlation (DCC) GARCH methodology. The focus of the study is to look into the dynamics of the correlations between both markets, and analyze whether those time-varying correlations evolve according to the situation—bullish or bearish—in the stock market. This paper investigates the links between price returns for 5 commodity sectors and Islamic stock market over the period from January 2001 to March 2013, by paying a particular attention to the Energy sector. We show that the correlations between commodity and Islamic stock markets evolve through time and are highly volatile, particularly since the 2007-2008 financial crises. The latter has played a key role, emphasizing the links between Islamic stock and commodity markets, and underlining the financialization of commodity markets. At the idiosyncratic level, a speculation phenomenon is highlighted for energy sector (oil), while the safe-haven role of precious metal sector (gold) is evidenced.

Suggested Citation

  • Khan, Aftab & Masih, Mansur, 2014. "Correlation between Islamic stock and Commodity markets: An investigation into the impact of financial crisis and financialization of commodity markets," MPRA Paper 56979, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:56979
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    File URL: https://mpra.ub.uni-muenchen.de/56979/1/MPRA_paper_56979.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Islamic Capital Market; Commodity Market; Financial Crisis; Multivariate GARCH Dynamic Conditional Correlations.;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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