Do global factors drive the interconnectedness among green, Islamic and conventional financial markets?

Abstract

PurposeThis study aims to examine the connectedness among green, Islamic and conventional financial markets from December 2008 to May 2021. Moreover, the impact of global factors on the connectedness of given financial markets is also observed.Design/methodology/approachThis study first employed the time-varying parameter vector autoregressions (TVP-VAR) technique to explore the connectedness of markets. Second, This study utilized the wavelet coherence analysis to test the time-frequency impact of global factors in terms of implied volatilities of stock, oil, gold, currency and bond on the connectedness across financial markets.FindingsThis study finds Islamic stocks, sustainability index and S&P500 composite index are the net transmitters, whereas Sukuk, commodity index, bond market, clean energy and green bonds are the net recipient of spillovers. Time-varying features of green, Islamic and conventional financial markets are evident in system-wide connectedness. This study further evidenced that global factors drive the connectedness of financial markets, particularly during stressful times.Practical implicationsThe findings of this study furnish significant implications for policymakers, regulatory authorities, investors, financial market participants and portfolio managers in terms of carefully assessing the unique characteristics offered by each financial market in terms of risk mitigation and diversifying the portfolios.Originality/valueUsing a portfolio of green, Islamic and conventional financial markets, the uniqueness of this study lies in the examination of the connectedness of these markets by deploying the TVP-VAR technique. In addition, wavelet analysis offers a significant contribution in terms of global factors driving the connectedness of green, Islamic and conventional markets.

Vulnerability of Sustainable Islamic Stock Returns to Implied Market Volatilities: An Asymmetric Approach

“…It becomes pertinent to examine the asymmetric effect of implied volatilities on Islamic stocks which have gained investors' attention over time [20][21][22]. is is particularly important because Islamic stocks are most likely than not susceptible to external shocks [22,23].…”

“…It becomes pertinent to examine the asymmetric effect of implied volatilities on Islamic stocks which have gained investors' attention over time [20][21][22]. is is particularly important because Islamic stocks are most likely than not susceptible to external shocks [22,23]. is empirical discourse would highlight the relevance of forming reliable portfolios among market volatility indices as external shocks transmitters and Islamic stocks.…”

“…is is because, recently, Islamic stocks are becoming linked to shocks from implied volatilities [22,24]. is can be traced from the behaviour of conventional investors and fund managers who seek to invest in Islamic stocks to minimise losses during crises.…”

Comparing the asymmetric efficiency of dirty and clean energy markets pre and during COVID-19

“…Analyzing the financial market efficiency has important implications for academic researchers and market participants ( Karim and Naeem, 2021 , Karim and Naeem, 2022 ). Moreover, a comprehensive understanding of market efficiency dynamics is a crucial policy tool to warrant accurate asset pricing and a well-functioning market ( Aloui et al, 2018 ).…”

Guest editorial: Green and sustainable corporate finance: past, present and future

“…In the second paper, Karim and Naeem (2022) examine the connectedness among green, Islamic and conventional financial markets from December 2008 to May 2021. Employing time-varying parameter vector autoregressions (TVP-VAR) technique and wavelet coherence analysis, the study finds that Islamic stocks, sustainability index and S&P500 composite index are the net transmitters, whereas Sukuk, commodity index, bond market, clean energy and green bonds are the net recipient of spillovers.…”