Islamic markets may be a better bet for investors as uncertainty sends shockwaves through the financial sector, as evidence shows that markets in the region are able to withstand crises better than conventional indexes.
The new research, published in the Pacific-Basin Finance Journal by researchers from Anglia Ruskin University alongside colleagues from Tunisia, the United States, France and Saudi Arabia, found that global financial crises strongly affect cross-market volatility, but due to the presence of Sharia-compliant stocks and Islamic bonds (sukuk) – which operate differently to those in conventional indexes – Islamic markets isolated themselves from non-Islamic counterparts during turbulent times.
This meant they were better protected against potential shocks such as the Global Financial Crisis of 2007/2008, where mainstream markets collapsed simultaneously.
Although there are volatility spillovers into Islamic markets during times of crises, they are significantly weaker that those that affect conventional indexes. For example, the contribution of the Dow Jones Islamic Market US index to the volatility of other Islamic stock markets is 66.56 percent, much lower than its contribution of 91.94 percent to volatility in conventional counterparts.
Furthermore, the analysis of directional volatility spillovers show that the spillovers from each index to other Islamic indexes are below 20 percent during the crisis periods. This suggests the Islamic markets are ‘decoupling’ or isolating themselves from other indexes during times of financial turmoil.
Dr Larisa Yarovaya, Lecturer in Accounting and Finance at Anglia Ruskin University, said: “During the last decade, Islamic assets have expanded in markets across the world, and they operate differently from their conventional counterparts. Our research shows that while these markets are not immune from financial shocks, Islamic markets have a tendency to isolate themselves quickly during times of turmoil, resulting in lower spillovers from troubled conventional markets.
“These findings demonstrate that these markets are safe havens for investors looking to diversity their portfolio and to hedge market risk at times of financial turmoil elsewhere in the world,” Yarovava concluded.
