Abstract
This paper investigated the volatility spillover effects between Islamic stock markets and Korean stock market using the AR-DCC-GARCH models. First, we found bi-directional volatility transmissions between the Islamic and Korean financial markets. Second, we compared the correlation of KOSPI-DJIM portfolio and that of KOSPI-SHX portfolio. It shows the former has stronger linkage than the latter. In the portfolio perspective, the S&P 500 Sharia stock Index (SHX) acts as a better hedge asset than DJIM against the risk of stock market. Lastly, the hedge ratio between two Islamic stock market and Korean stock market pairs is generally low, indicating that the Korean stock risk can be effectively hedged by taking a short position in the Islamic stock markets. In comparison with two pairs, the pair of KOSPI-SHX relatively shows a cheaper hedging cost than that of KOSP-DJIM pair. This evidence indicates that S&P 500 Sharia index serve more effective hedging role against the risk of Korean stock market.
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