Determinants of financial stability and risk transmission in dual financial system: Evidence from the COVID pandemic

Elsayed, Ahmed H.; Ahmed, Habib; Husam Helmi, Mohamad

Abstract

Existing literature on spillovers and connectedness between Islamic and conventional financial markets overlooked the fundamental role played by money markets in volatility spillovers and risk transmission across markets. That being so, this paper aims at investigating the dynamic co-movements and volatility spillovers across Islamic and conventional financial markets in a dual financial system over the period from January 3, 2007 to June 30, 2021. To this end, the DECO-GJR-GARCH model and the volatility spillover approach were applied. Furthermore, the ARDL model was utilised to explore the key determinants of co-movements and risk transmission across Islamic and conventional financial markets. This not only allowed us to study the interconnectedness and volatility spillovers between financial sectors under different market conditions but also enabled us to highlight the key role played by the money markets. Empirical results show that markets have significant responses to any new relevant information. While both conventional stock and money market are the main transmitters of shocks to other markets, the Islamic money market is a net recipient. Furthermore, the volatility spillovers across conventional and Islamic financial markets became stronger during the COVID-19 epidemic. The study also finds that global uncertainties have a significant and negative impact on the dynamic co-movements, but not on volatility connectedness among the underlying markets. These findings have important implications for many stakeholders including portfolio managers, investors, and policymakers in terms of diversifying their portfolios and enhancement of financial stability during times of black swan events and negative shocks such as the COVID-19 pandemic.

Citation

Elsayed, A. H., Ahmed, H., & Husam Helmi, M. (2023). Determinants of financial stability and risk transmission in dual financial system: Evidence from the COVID pandemic. Journal of International Financial Markets, Institutions and Money, 85, https://doi.org/10.1016/j.intfin.2023.101784

• Journal Article Type: Article
• Acceptance Date: May 11, 2023
• Online Publication Date: May 30, 2023
• Publication Date: 2023
• Deposit Date: Jun 20, 2023
• Publicly Available Date: Jun 20, 2023
• Journal: Journal of International Financial Markets, Institutions and Money
• Print ISSN: 1042-4431
• Electronic ISSN: 1873-0612
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 85
• DOI: https://doi.org/10.1016/j.intfin.2023.101784
• Public URL: https://durham-repository.worktribe.com/output/1172161