Islamic stock markets and COVID-19-induced shocks: simulations with global VAR approach
International Journal of Islamic and Middle Eastern Finance and Management
ISSN: 1753-8394
Article publication date: 6 August 2021
Issue publication date: 19 April 2022
Abstract
Purpose
This paper aims to make the first attempt to study the transmission of COVID-19 pandemic-induced shocks to the global Islamic stock markets in the midst of the overall macroeconomic environment and cross-country trade linkages. This is made possible by constructing a global vector autoregressive (GVAR) model and with it the authors arrive at noteworthy conclusions.
Design/methodology/approach
The paper estimates both fixed and time-varying weights GVAR models for 15 Islamic stock markets with 5,000 bootstrap replications and reports impulse response functions. It simulates four shocks associated with the pandemic: first, a standard error negative shock to oil price; second, a standard error negative shock to the global Islamic stock markets; third, a standard error positive shock to equity-based uncertainty index; and fourth, a standard error negative shock to economic activity (inflation).
Findings
The paper shows that the pandemic engenders immediate negative impacts on the Islamic stock markets with the biggest impacts borne by the USA and China and the least by markets in the Middle East. The study documents the magnitudes of the responses to the shocks and shows that the impacts of the pandemic will take about 20 months to wither completely.
Originality/value
The findings throw up diversification benefits for investors toward the UAE, Oman, Bahrain and other Middle East markets especially during crisis. It further reveals the need for counter-cyclical measures in all countries to curtail the negative impacts of the pandemic which could linger for up to 20 months.
Keywords
Acknowledgements
Declaration of interest statement: The authors declare that there are no conflicts of interest. The authors certify that this manuscript has not been previously submitted to another journal and has not been published in any form whatsoever. They take full responsibility for all errors. Adediran hereby acknowledges financial support from ILMA University, Karachi, Pakistan.
Citation
Adediran, I.A., Salawudeen, A. and Ashraf Sabzwari, S.N. (2022), "Islamic stock markets and COVID-19-induced shocks: simulations with global VAR approach", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 15 No. 2, pp. 287-309. https://doi.org/10.1108/IMEFM-02-2021-0077
Publisher
:Emerald Publishing Limited
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