Stock Market Return and Volatility Spillovers: The Case of Selected Muslim Majority Countries

Abstract

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.

Keywords: Return Spillover Index, Volatility Spillover Index, Religion, Culture

JEL Classification: F65, G15, Z12