Returns and Volatility Spillover between Islamic and Conventional Indexes: Evidence from Selected Emerging Asian Markets

Muhammad Azhar Khan & Ajid ur Rehman
Published Online: December 2018

This study is an attempt to explore whether explicit Islamic (Sharīʿah based) investment criteria have any impact on return and volatility spillover from Islamic to conventional indexes and vice-versa. It pertains to five selected emerging Asian markets i.e. China, India, Indonesia, Malaysia and Pakistan. The return and volatility spillover has been measured in this study using the spillover index approach introduced by Diebold and Yilmaz (2012), built on the idea of Forecast Error Variance (FEV) decomposition in the generalized Vector Autoregressive (VAR) framework. The study finds that Islamic indexes are recipients of volatility spillovers from conventional indexes both in the selected Muslim minority countries (China and India) as also in countries where Muslims are in majority (Indonesia and Pakistan). Moreover, during normal periods, mean returns of conventional indexes in both categories of countries are better than that of Islamic indexes. During crises, however, Islamic indexes performed comparatively better than their conventional counterparts in Indonesia and Pakistan (Muslims majority countries), thus providing a diversification opportunity. Findings of this study have implications for policy makers, fund managers and individual investors for better understanding the diversification opportunities both in in normal business environment and in crisis period. Moreover, faith-based investors and portfolio managers may not get the desired benefit of diversification linked to investing in Islamic assets alone; therefore, they should include other classes of assets in their portfolios to mitigate risk.


Return and Volatility spillover, Islamic and conventional Indexes, emerging stock markets, Islamic finance.