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ABSTRACT
This paper examines the time-varying conditional correlations between seventeen metal future markets and Malaysian Islāmic bonds. We apply twelve sixvariate dynamic conditional correlation (DCC) FIGARCH models in order to capture potential contagion effects between the markets for the period 2007-2011. Empirical results reveal contagion during the under investigation period regarding the twelve sixvariate models, showing potential volatility transmission channels among the markets and implying that the sukūk bonds are not a safe haven during bearish times without portfolio diversification strategies. Findings have crucial implications for policymakers who provide regulations for the above derivative markets and for investors who invest long-term in Islāmic bonds.
JEL Classification: C58, C61, E44, G10, G20
Key words: DCC-FIGARCH, Metal futures, Sukūk, Financial contagion, Islāmic finance
Submitted: 11/11/2020; Accepted: 18/05/2021; Published 28/12/2021
(ProQuest: ... denotes formulae omitted.)
1.INTRODUCTION
Volatility transmission channels in Islāmic equity markets have motivated empirical researchers to study the contagion in Islāmic bond markets on derivative markets such as future markets during major global crises. The Global Financial Crisis of 2008 has led researchers to explore and discover potential spillovers among various financial and derivative markets, previously unexplored. This paper investigates the volatility spillover effects and the contagion effects (positive dynamic condition correlations) among major metal future markets and Malaysian Islamic bonds (Narayan and Phan, 2019; Ahmed and Elsayed, 2019; Trabelsi, 2019; Gupta and Marfatia, 2019; Umar, 2017; Aloui, Hammoudeh, and Hamida, 2015; Mosaid and Boutti, 2014; Saiti, Bacha, and Masih, 2014; Rusgianto and Ahmad, 2013; Andersson et al., 2008) for the period 2007-2011. We answer whether Islamic bond markets are safe havens during major crises by taking into consideration the contagion with the under investigation metal future markets. The recent global financial crisis has made assets with low correlations attractive for investors regarding the systematic risk protection. We extend the correlation analysis of Forbes and Rigobon (2002) by considering the Dynamic Conditional Correlation Fractionally Integrated GARCH (DCC-FIGARCH) of Engle (2002).
The main objectives of this paper are to address the following questions which are under-researched in the literature. Do Dynamic Conditional Correlations (DCCs) among those seemingly unrelated metal futures markets and Islamic bonds (Zin et al., 2011; Karim, Kassim, and Arip, 2010) exist? Are those DCCs volatile? How do those DCCs evolve over time? Are...