The contagion effect between the oil market, and the Islamic and conventional stock markets of the GCC country: Behavioral explanation
International Journal of Islamic and Middle Eastern Finance and Management
ISSN: 1753-8394
Article publication date: 10 April 2018
Issue publication date: 5 June 2018
Abstract
Purpose
This study aims to investigate the transmission of shock between the oil market and the Islamic and conventional stock markets of the Gulf Cooperation Council (GCC) countries during the oil shocks of 2008 and 2014.
Design/methodology/approach
This study uses two models. First, the dynamic conditional correlation–generalized autoregressive conditionally heteroskedastic model has been used to capture the fundamental contagion effects between the oil market and the Islamic and conventional stock markets during the tranquil and turmoil-crisis periods of 2008-2014. Second, the filter of Kalman has been used to capture the effects of pure contagion between the oil market and the GCC Islamic and conventional stock markets. The authors analyze the dynamic correlation between forecasting errors of oil returns and stock returns of GCC Islamic and GCC conventional indices.
Findings
The main findings of this investigation are: first, the estimation of the dynamic conditional correlation– generalized autoregressive conditionally heteroskedastic model for oil market and the Islamic and conventional stock markets proves that the Islamic and conventional stock markets and oil market displayed a significant increase in the dynamic correlation during the turmoil period, from mid-2008 and mid-2014. This proves the existence of contagion between the markets studied. Second, the authors analyze the dynamic correlation between forecasting errors of oil returns and stock returns of GCC Islamic and GCC conventional indices. They show a strong increase in the correlation coefficients between the oil market and the conventional GCC stock markets, and between the conventional and Islamic GCC stock markets during the oil crisis of 2014. However, there is no change in regime in the figure of the correlation coefficient between the oil market and the GCC Islamic stock markets during the 2008 financial crisis. This pure contagion is mainly attributed to the herding bias in 2014 oil crisis.
Originality/value
This study contributes to identifying the contribution of herding bias on the volatility transmission between the oil markets, and the GCC Islamic and conventional stock market, especially during two controversial shocks: the 2008 oil-price increase and the 2014 oil drop.
Keywords
Citation
Mezghani, T. and Boujelbène, M. (2018), "The contagion effect between the oil market, and the Islamic and conventional stock markets of the GCC country: Behavioral explanation", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 11 No. 2, pp. 157-181. https://doi.org/10.1108/IMEFM-08-2017-0227
Publisher
:Emerald Publishing Limited
Copyright © 2018, Emerald Publishing Limited