Modelling the directional spillovers from DJIM Index to conventional benchmarks: Different this time?

Abstract

Abstract In this study, we examine the issues of directional interdependence and financial performance of Sharia-screened Islamic equity finance with conventional benchmarks. To do this, we examine the directional spillover via return and volatility spillovers between Islamic stock index represented by Dow Jones Islamic Market Index (DJIMI) and three conventional stock indices viz., Standard & Poor’s (S&P) 500 for USA, S&P Europe and S&P Asia 50 along with major global risk factors viz., Europe and US interest rate benchmarks, volatility index (VIX) to capture stock market risk and crude oil prices between 01 March 2006 and 30 June 2015. Using spillover index and dynamic conditional correlation models, we find that there is a visible level of directional interdependence between DJIMI and conventional indices, though the magnitude is not as high as we find among conventional indices. Particularly, during the global financial crisis (2008) period, the DJIMI shows the patterns of decoupling which are in line with previous studies. To risk factors, DJIMI shows an inverse relationship with VIX, European interest benchmark, and crude oil prices. However, the DJIMI shows a positive relationship with US interest rate. The findings thus suggest that the Sharia-screening does play a constructive role in the financial performance of DJIMI. We finally conclude that the Sharia-screened Islamic equity index may act as an effective hedging instrument during the crisis period.