Contagion between Islamic and Conventional Banks in Malaysia: Empirical Investigation using a DCC-GARCH Model

Abstract

The purpose of this paper is to compare the stability, in terms of contagion, of conventional and Islamic banks in Malaysia. We use a DCC-GARCH model to estimate the dynamic conditional correlation (a measure of financial contagion) for a sample of one Islamic bank and eight conventional banks during the period from March 31, 2004 to March 18, 2014. From the empirical findings, we show that the conditional correlation between the returns of conventional and Islamic banks in Malaysia increased during the period of financial crisis. This finding implies the existence of a financial contagion effect between Islamic and conventional banks in Malaysia. Also, we find that financial contagion represents a major factor for the transmission of risk between Islamic and conventional banks.