Switching spillovers and connectedness between Sukuk and international Islamic stock markets

• Published in: Pacific-Basin finance journal 2024-04, Vol.84, p.102318, Article 102318
• Main Authors: Mensi, Walid, Lee, Yeonjeong, Al-Kharusi, Sami, Yoon, Seong-Min
• Format: Article
• Language: English
• Subjects: Downside risk; Islamic stocks; MS-VAR model; Regime switching; Spillovers; Sukuk
• ISSN: 0927-538X; 1879-0585
• DOI: 10.1016/j.pacfin.2024.102318

This study examines the switching volatility spillovers and connectedness between the Dow Jones Sukuk and global and two regional Islamic stock markets (World, Asia, and Europe). Using the Markov switching-vector autoregression and spillover index models, we show that Islamic stock markets are significantly affected by their own shocks under the low-volatility regime (Regime 1), whereas the results are insignificant under the high-volatility regime (Regime 2), except for the World Islamic markets. Similarly, Sukuk is affected by its own shocks, and the magnitude of the spillover increases in a high-volatility regime. Sukuk has an insignificant impact on Islamic stocks in Regime 1 and the effect becomes significant in Regime 2. Moreover, the likelihood of transition is more persistent in Regime 1 than in Regime 2. In addition, the shifts from one regime to another are more persistent than those in the opposite sense. Furthermore, the World Islamic stock markets are the net contributors of spillover to Sukuk for all regimes, and their capacity for spillover increases in Regime 2, whereas Sukuk is the net receiver of spillover for both regimes. In contrast, the ability of the European and Asian Islamic markets as net contributors decreases in Regime 2, and the contribution of Sukuk spillovers increases. Portfolio risk analysis under low- and high-volatility regimes is also discussed. •Switching volatility spillovers and connectedness between the Sukuk and international Islamic stock markets are examined.•Markov switching-vector autoregression and spillover index models are used.•The ability of the European and Asian Islamic markets as net contributors decreases under the high-volatility regime.•The contribution of Sukuk spillovers increases under the high-volatility regime.•Portfolio risk analysis under low- and high-volatility regimes is discussed.