A wavelet-based approach to testing shari’ah-compliant stock market contagion:evidence from the ASEAN countries
Recently there has been a heightened global concern over ‘contagion’ in the conventional financial markets. Our study is motivated by the desire to test empirically whether this contagion is reflected in the fast growing Islamic financial markets as well. This study is the first attempt at testing...
| Main Authors: | , , |
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| Format: | Article |
| Language: | English |
| Published: |
INSI Publications
2013
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| Subjects: | |
| Online Access: | http://irep.iium.edu.my/44503/ http://irep.iium.edu.my/44503/ http://irep.iium.edu.my/44503/1/contagion.pdf |
| Summary: | Recently there has been a heightened global concern over ‘contagion’ in the conventional
financial markets. Our study is motivated by the desire to test empirically whether this contagion is
reflected in the fast growing Islamic financial markets as well. This study is the first attempt at testing
whether there has been any contagion among the Shari’ah-compliant stock markets during the most
recent international financial crisis: the US subprime crisis of 2008, with the application of a technique
known as ‘wavelet approach’ which has been very recently imported to finance from engineering
science. We analyse the daily data covering the period from June 2006 to August 2009 for the stock
market indices of the original ASEAN countries plus Australia and USA such as, NYSE COMPOSITE
(US), MSCI Islamic (Australia), MSCI Islamic (Singapore), FTSE Bursa EMAS Shari’ah (Malaysia),
Jakarta SE Islamic (Indonesia), MSCI Islamic (Thailand) and MSCI Islamic (Philippines). Our
findings based on the time-scale decomposition property of wavelet analysis tend to indicate that in all
cases of selective Shari’ah-compliant stock markets the changes in the wavelet correlation coefficients
are insignificant at all time scales during the US subprime crisis. The changes observed in wavelet
correlation coefficients are insignificant due to overlapping of confidence intervals implying that there
is no clear evidence of contagion at all time scales. These findings are plausible and intuitive and have
implications for the Shari’ah-compliant stock markets in terms of asset allocation strategy of risk
managers and for policymakers’ optimal policy response to a crisis. |
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