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As integration is related to systemic risk and rewards
in the stock markets, it is coupled with both weak and semi-strong
forms of efficiency. Little evidence is found on return and volatility
spillover within the Muslim country markets. This study investigates
if the Muslim majority countries are interconnected with each other
through returns and volatility spillovers among the stock markets
for the span of about twenty years from July 1996 to February
2016. Vector Autoregressive (VAR) method as applied by Diebold
and Yilmaz (2009) has been used to find the static and dynamic
spillover indices of nine countries with religious similarity in 80%
of the population and their three developed counterparts. We found
overall significant spillovers; returns connectedness was 36.5% and
volatility connectedness 22.4%. The study did not find any outright
integration or evidence of spillover from developed markets to the
Muslim majority group. However, US and Japan caused returns and
volatility shocks respectively. In dynamic analysis, both returns and
volatility spillover showed a gentle and stable increase in integration.
Moreover, volatility spillover responded not only to the major global
financial crises but also to the Arab Spring. These findings have
major implications for diversified investment in the global financial
market.
Najam us Sahar, Syed Zulfiqar Ali Shah. (2017) Stock Market Return and Volatility Spillovers: The Case of Selected Muslim Majority Countries, Journal of Islamic Business and Management, Volume 7, Issue 1.
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