Volatility spillovers among Islamic countries and geopolitical risk

Abstract

Purpose This paper aims to test for volatility spillovers among Islamic stock markets with the exogenous impact of geopolitical risk (GPR) to check the risk transmission among Saudi Arabia, Malaysia, Indonesia and Turkey. Researchers test for both the symmetric and asymmetric risk transmission. Design/methodology/approach For the symmetric response of volatility, the study uses simple generalized autoregressive conditional heteroscedastic (GARCH) and for the asymmetric response of volatility with the exogenous impact of GPR, the exponential GARCH models have been adopted. Findings The results suggest spillover effects exist from Turkey to Saudi Arabia, Indonesia to Malaysia and Saudi Arabia and Malaysia to Indonesia. The findings of volatility spillover from GPR to sample countries suggest that only Malaysia and Indonesia experience volatility spillovers from GPR. Research limitations/implications The present study is limited to the context of four countries and Islamic equities; the study contributes to the literature on volatility spillover, Islamic finance, GPR and asset pricing. Practical implications This study contributes to individual, institutional investors’ policymakers’ knowledge in determining security prices, trading plans, investment hedging and policy regulation. Social implications The extant literature disregards the GPR index to examine the volatility spillover effects among Islamic stock markets, which allow researchers to justify the mechanism of risk transmission due to GPR across the Islamic stock market. Originality/value To the best of the authors’ knowledge, this is the first research of its type to look at volatility spillover and GPR transmission in Islamic stock markets.