Return and volatility spillovers in the presence of structural breaks: evidence from GCC Islamic and conventional banks

Abstract

The dynamics of return and volatility spillover indices were investigated to reveal the strength and direction of transmission that occurred during a financial crisis. The focus of this study was especially placed on the 2007 US subprime mortgage crisis, the global financial crisis, the European sovereign debt crisis, and the dramatic collapse of oil prices since 2014. The paper uses the Diebold and Yilmaz (Economic Journal 119(534): 158–171, 2009, International Journal of Forecasting 28(1): 57–66, 2012) spillover index behavior. Assuming one structural break, return and volatility linkages for Islamic banks in the GCC were stronger than for conventional banks. When multiple breaks were allowed, the spillover index was found to be highly sensitive to various economic events. Overall, the findings of this study provide new insights into the behavior of the Islamic and conventional banks stock returns and volatility spillovers, which may improve investment decisions and the trading strategies portfolio of investors.