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How do the global equity and bond markets affect Islamic and conventional banks? A comparative cross-country analysis using multivariate regression quantiles

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Abstract

Using the multivariate quantile autoregression technique, we examine how equity returns of Islamic and conventional banks are affected by shocks to major financial indices such as the DJUSI index, the MSCI World Index, the VIX index and the United States 10-years Treasury bond interest rate. We compare the stability of the two banking systems to financial risk spillovers at the global and regional levels based on data from 16 countries for the period after the 2008 crisis. The empirical findings suggest that Islamic banks’ equities have weaker codependency with major equity markets than conventional banks at the global level while Islamic banks’ codependency with the 10-years US Treasury bond rate tends to be stronger than conventional banks indicating the sensitivity of Islamic banks to global interest rates. The empirical results also reveal that there does not seem to be any significant difference between stock price reactions of Islamic and conventional banks both at the regional and global levels in response to shocks to major financial indices. Regarding regional comparison of Islamic banks only, we find that Islamic bank performance does not vary much across heterogeneous geographic regions.

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Availability of data and material

Thomson Reuters Datastream.

Code availability

MATLAB.

Notes

  1. Islamic Financial Services Board.

  2. The Dow Jones 65 Composite Average consists of the 30 stocks that form the Dow Jones Industrial Average (DJIA), 20 stocks that make up the Dow Jones Transportation Average, and 15 stocks of the Dow Jones Utility Average. All of the Dow Jones averages are price-weighted indices.

  3. 23 countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the UK and the US.

  4. In quantile figures, we sort banks according to 1st day effect of 1% quantiles of bank equity returns regardless of bank types. These figures describe both Islamic and conventional banks’ equity price performances according to different financial shocks in the same graph.

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  1. Department of Economics, Istanbul Technical University, Macka, 34367, Istanbul, Turkey

    Resul Aydemir, Huzeyfe Zahit Atan & Bulent Guloglu

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  1. Resul Aydemir
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  2. Huzeyfe Zahit Atan
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  3. Bulent Guloglu
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Aydemir, R., Atan, H.Z. & Guloglu, B. How do the global equity and bond markets affect Islamic and conventional banks? A comparative cross-country analysis using multivariate regression quantiles. Eurasian Econ Rev 12, 95–114 (2022). https://doi.org/10.1007/s40822-022-00198-5

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