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How strong are the causal relationships between Islamic stock markets and conventional financial systems? Evidence from linear and nonlinear tests
Journal article   Open access   Peer reviewed

How strong are the causal relationships between Islamic stock markets and conventional financial systems? Evidence from linear and nonlinear tests

Ahdi Noomen Ajmi, Shawkat Hammoudeh, Duc Khuong Nguyen and Soodabeh Sarafrazi
Journal of international financial markets, institutions & money, v 28(1), pp 213-227
Jan 2014
DOI: https://doi.org/10.1016/j.intfin.2013.11.004
Featured in Collection :   UN Sustainable Development Goals @ Drexel
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SubmittedOpen Access (License Unspecified),  Open

Abstract

Financial and economic shocks Islamic finance Robust causality tests
•We examine the links between the Islamic and global conventional equity markets.•The link between the Islamic market and several global shocks is also studied.•There is evidence of linear and nonlinear causality between the studied markets.•We also find potent causality between the Islamic market and financial/risk factors.•The results suggest rejection of the decoupling hypothesis for the Islamic market. Past studies suggest that the Islamic finance system is only weakly linked or even decoupled from conventional markets. If this statement is true, then this system may provide a cushion against potential losses resulting from probable future financial crises. In this article, we make use of heteroscedasticity-robust linear Granger causality and nonlinear Granger causality tests to examine the links between the Islamic and global conventional stock markets, and between the Islamic stock market and several global economic and financial shocks. Our findings reveal evidence of significant linear and nonlinear causality between the Islamic and conventional stock markets but more strongly from the Islamic stock market to the other markets. They also show potent causality between the Islamic stock market and financial and risk factors. This evidence leads to the rejection of the hypothesis of decoupling of the Islamic market from their conventional counterparts, thereby reduces the portfolio benefits from diversification with Sharia-based markets. A striking result shows a connection between the Islamic stock market and interest rates and interest-bearing securities, which is inconsistent with the Sharia rules. The results also suggest that modeling Islamic stock markets should be done within a nonlinear VAR system and not through a regression equation.

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184 citations in Web of Science
198 citations in Scopus

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UN Sustainable Development Goals (SDGs)

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#8 Decent Work and Economic Growth

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Collaboration types
Domestic collaboration
International collaboration
Web of Science research areas
Business, Finance
Economics
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