Islamic equities and COVID-19 pandemic: measuring Islamic stock indices correlation and volatility in period of crisis

Abstract

PurposeThe purpose of the study is to measure cross-country stock market correlation and volatility transmission during the global coronavirus disease 2019 (COVID-19) pandemic. The paper traces trajectory of Islamic equity investments in order to get insights on the behavior of the markets during the crisis.Design/methodology/approachThe paper uses generalized method of moments (GMM), autoregressive distributed lag (ARDL) and multivariate GARCH (MGARCH) models for analysis of dynamic causality, stock market cointegration, correlation and volatility transmission between Islamic stock indices.FindingsThe result of normal correlation analysis on the share indices show the markets move together. The result of ARDL cointegration test shows the markets returns are cointegrated as a group. To further make sense of the data; the indices were grouped into four different categories, then cointegration tests were conducted. The results of the analysis show that the subgroups are cointegrated except the low COVID-19 subgroup. Based on MGARCH findings, the possibility of volatility transmission between markets during the crisis is high. The market returns indices show the usual herd mentality common during the period of crisis.Originality/valueUnlike other works in this area, this paper attempt to trace the trajectory of Islamic equity investment in order to get relevant insights and arrives at appropriate ways of responding to the crisis.