Abstract
The last financial crisis (2007-2008) raises the question of how European stock shocks
are distributed and transmitted from developed stock markets to Islamic stock markets.
More precisely, the problem related to Islamic finance or any other alternative finance
is, whether the shocks to the volatilities in the asset returns constitute substitute or
complement in terms of risks strategies. A good understanding of volatilities of asset
returns is necessary to analyze and forecast domestic and international investors’
portfolios. The cornerstone of the current paper is the analysis of the dynamic
correlations between the European conventional financial indices (as a proxy for global
benchmark) and Islamic indices. We have chosen European markets since most of the
works on this topic have focused on the US market. We have used the Dynamic
Conditional Correlations approach to detect any shifts in correlations between the
different indices over a recent period (from 07/31/2007 to 08/25/2017). The period
includes the most severe financial turbulences (2007-2011) in Europe. Two types of
distribution have been tested namely Gaussian distributions versus t-distributions. The
paper finds that European and Islamic indices are highly correlated. This point may be
useful for the policymakers because of the contagion risk. The results are robust across
different distributions and the model associated with t-distribution is more relevant.
Dr. Sabbah Gueddoudj. (2017) DCC-Garch Models Using Islamic Market and European Market Indices, Islamic Banking and Finance Review, Volume 4, Issue 1.
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