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Multivariate Co-movement Between Islamic Stock and Bond Markets Among the GCC: A Wavelet-Based View

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Abstract

In this study, we investigate the connectedness between sharia stock index and three Islamic bond yields within a global perspective of the Gulf Cooperation Council Islamic financial markets. The main novelty of the present study is that we extend previous studies by performing three wavelet variants in bivariate and multivariate frameworks, namely the wavelet multiple correlation, the wavelet multiple cross correlation and wavelet cohesion. The findings point out a significant changing pattern in the dynamic linkage between sharia stocks and Islamic bond yields in the time-frequency domain. A strong positive association is evidenced in the short horizons and a negative linkage is branded for longer time-scales. Some resemblances are found for the wavelet cohesion corroborating the existence of potential portfolios’ diversification opportunities at lower frequencies. The multivariate wavelet cross correlation unveils that the intensity of the co-movement reaches its zenith at high frequencies. These results are not similar to the bivariate wavelet coherence but are coincident with the wavelet cohesion approach, which may be due to the difference in dimensionality of the wavelet approaches. The implications of this study will be useful for Islamic portfolio managers, international investors and market regulators in better encircling the best ways to adopt a proactive knowledge of Islamic financial markets behavior.

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Notes

  1. Aloui et al. (2015a) discuss the main theoretical arguments to explain the association between sharia stocks and Islamic bonds.

  2. We discuss these two arguments in Sect. 2.

  3. The report is available on the link http://www.standardandpoors.com/spf/upload/Ratings_EMEA/IslamicFinanceOutlook_2014.pdf.

  4. Chakrabarty et al. (2015) provide an excellent review of the migration of the wavelet methodology to finance.

  5. Chakrabarty et al. (2015) establish a recent overview of the wavelet analysis and the investment horizon heterogeneous.

  6. The data are available on the link: http://www.nasdaqdubaihsbcindices.com/Pages/indices.htm.

  7. Readers can refer to the S&P Dow Jones Indices web link: http://us.spindices.com/indices/equity/sp-gcc-composite-shariah for more details.

  8. We should note that the S&P GCC composite sharia stock index is a composite portfolio combining the sharia stocks in the GCC stock markets for the main common sectors with the following weights: Materials (32.1%), Financials (31.9%), Telecommunication Services (14.6%), Industrials (7.4%), Consumer Staples (5.7%), Consumer Discretionary (4.0%), Utilities (2.0%), Energy (1.4%) and Health Care (0.9%).

  9. It is worthily noting that all the selected indexes are expressed in US dollar to avoid any bias created by foreign exchange rate fluctuations.

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Acknowledgements

C. Aloui and H. B. Hamida would like to extend their sincere appreciations to the Deanship of Scientific Research at King Saud University for its funding of this research through the Research Group Project [RGP-211].

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Authors and Affiliations

  1. College of Business Administration, King Saud University, BO. Box 2459, Riyadh, 11451, Saudi Arabia

    Chaker Aloui

  2. IPAG Business School, Boulevard Saint German, Paris, France

    Rania Jammazi

  3. The National School of Computer Sciences, Manouba University, Manouba, Tunis, Tunisia

    Rania Jammazi

  4. College of Economics and Administrative Sciences, Imam Muhammad Ibn Saud Islamic University (IMSIU), Riyadh, Saudi Arabia

    Hela Ben Hamida

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  1. Chaker Aloui
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  2. Rania Jammazi
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  3. Hela Ben Hamida
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Correspondence to Rania Jammazi.

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Aloui, C., Jammazi, R. & Hamida, H.B. Multivariate Co-movement Between Islamic Stock and Bond Markets Among the GCC: A Wavelet-Based View. Comput Econ 52, 603–626 (2018). https://doi.org/10.1007/s10614-017-9703-7

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