Systemic Risk Contribution in Islamic Equity Markets: CoVaR Based Model

Abstract

The main challenge by the study of systemic risk is the measurement of contagion that enables the impact of external movement in one market on other markets. One of the main tools that has been proposed for this purpose is the risk measure ∆CoVaR of Adrian and Brunnermeier (2011). This study explore the systemic risk profile of Islamic equity Markets based on CoVaR, ∆CoVaR and quantile regressions. We empirically investigate the systemic risk contributions of 10 Islamic Dow Jones sector equity indexes covering 15 years of daily data in the U.S stock Market. Evidences show that Industrial and Technology sectors contributing the most to systemic risk in the US. Furthermore, we confirm that the Oil & Gas and Technology sectors were the most exposed to systemic risk and hence a larger risk spillover in distressed period.

Keywords: Quantile Regression, CoVaR, ∆CoVaR, Islamic Equity Markets

JEL Classification: C58, D53, G01, G32