Dynamic dependence of the global Islamic equity index with global conventional equity market indices and risk factors

• Dependence of the Islamic equity index with major global markets and factors is studied.
• The copula approaches capture both average and extreme dependence structures.
• Significant dependence between Islamic markets and global markets and factors is found.
• Dependence structure also varies over time for almost all cases and is asymmetric.
• Sharia-compliant rules are not restrictive enough to make the Islamic investments different.

Past studies have shown considerable differences between equity markets in conventional and Islamic financial systems, in terms of financial products and principles. Using a copula approach, this study shows that the global Islamic equity market index (represented by the Dow Jones Islamic Market Index) exhibits significant dependence with three major global conventional equity indices (Asia, Europe, and United States) and the global factors (oil prices, stock market implied volatility (VIX), the U.S. 10-year Treasury bond interest rate, and the 10-year European Monetary Union government bond index) which are common to the world financial system and pertinent to contagion risks in the case of financial crises. Moreover, this dependence varies over time for all cases except the S&P 500 index and is also asymmetric between bear and bull markets in some cases. Our findings thus suggest that the Sharia-compliance rules are not restrictive enough to make the global Islamic equity market index very different from the conventional indices. In addition, the decoupling hypothesis of the Islamic equity universe from the conventional financial system is not well supported by our empirical evidence.