Volatility spillover and hedging effectiveness among China and emerging Asian Islamic equity indexes

- We provide an original research of Islamic volatility spillover in emerging markets in Asia.
- The VARMA-BEKK-AGARCH model is the best suited model for estimating Islamic financial market spillover.
- Implications for market risk, policy regulations and hedging effectiveness are discussed.

We study the volatility spillover between China and Asian Islamic stock markets. We use a sample of six Islamic MSCI indices from the Asian region, namely China, India, Malaysia, Indonesia, Korea and Thailand obtained from MSCI (Morgan Stanley Capital International). In this paper we analyze the importance of considering spillover effects between emerging Asian Islamic indexes based on the Bivariate VARMA-BEKK-AGARCH model of McAleer et al. (2009), which includes spillover and asymmetric effects. We compute after the effectiveness of portfolio diversification based on the conditional volatility of returns series. Results show a significant positive and negative return spillover from China to selected Asian Islamic stock market and bidirectional volatility spillovers between China, Korea and Thailand Islamic market showing evidence of short-term predictability on Islamic Chinese stock market movements. However there is no short term volatility persistence in India, Indonesia and Malaysia. GARCH results show no persistence in volatility spillover effect in long term from Chinese to Indian, Indonesian and Korean Islamic stock market. Our findings are beneficial for international portfolio diversification for policy makers and investors since the results of portfolio management and hedging effectiveness ratio are different to previous studies.