Are emerging Islamic equity markets immune from contagion effects during the COVID-19 pandemic crisis? Evidence from the higher-order comoment-based contagion tests

Abstract

In this paper, we investigate the possible contagion effects of the COVID-19 pandemic on twenty-four emerging Islamic equity markets. To test for contagion, we use statistical tests based on changes in correlation and higher-order comoments. We also split the full sample into three sub-periods while identifying two phases of the COVID-19 crisis. Our main empirical findings indicate significant evidence of contagion during the two COVID-19 phases, especially through the coskewness, cokurtosis, and covolatility channels. Interestingly, we find that most emerging Islamic equity markets are not immune from the contagious effects of the COVID-19 pandemic. Furthermore, we draw on six behavioural indicators and construct a new index entitled ‘Feverish sentiment’ to examine the causal relationships between investor sentiment and emerging Islamic equity index returns during the COVID-19 pandemic. Using both traditional and frequency-domain Granger causality tests, we find significant causal linkages between investor sentiment and some emerging Islamic equity markets in low, medium, and high frequencies. In particular, the results highlight an increase in the predictive power of investor sentiment during the second phase of the COVID-19 pandemic.

Keywords:

• Contagion
• COVID-19 pandemic
• higher-order comoments
• Islamic equity markets
• investor sentiment

JEL CLASSIFICATION:

• C32; C58; G11; G15

Acknowledgement

The authors would like to thank the editor and anonymous referees for their valuable comments that greatly improved our paper.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 See https://www.isdb.org/publications/the-covid-19-crisis-and-islamic-finance-response-of-the-islamic-development-bank-group.

2 Generally, three prominent measures of investor sentiment have been proposed in financial literature: market-based proxies (Baker & Wurgler, 2006, 2007) , search-based approach (Da et al., 2011, 2015; Joseph et al., 2011; Solanki & Seetharam, 2018; Yuan et al., 2022), and survey approach (Batrancea, 2021a ; Brown & Cliff, 2005; Perez-Liston et al., 2016).

3 For an extensive review of the literature of financial contagion, see Dornbusch et al. (2000), Pericoli and Sbracia (2003), Dungey et al. (2005), and Forbes (2012).

4 The MSCI Global Islamic equity Indices were launched in July 2007. They reflect Sharia investment principles while retaining replicability for international investors. They are constructed from the underlying MSCI country indices and cover over 70 of MSCI's developed, emerging, and frontier market countries. The set of the 24 emerging Islamic countries includes China, Egypt, Kuwait, United Arab Emirates, Qatar, Saudi Arabia, Oman, Turkey, Brazil, Chile, Mexico, Peru, Thailand, Russia, South Africa, Czech Republic, Indonesia, India, Malaysia, Philippines, Poland, Taiwan, Morocco, and Bahrain.

5 See https://www.who.int/news/item/29-06-2020-covidtimeline.

6 This statistical test has three alternative hypotheses against the null hypothesis: (i) $H_1^1: {\mu }_1<{\mu }_2,$ (ii) $H_1^2: {\mu }_1>{\mu }_2,$ and (iii) $H_1^3: {\mu }_1\ne {\mu }_2,$ where ${\mu }_1$ and ${\mu }_2$ denote the mean returns during the pre-COVID-19 phase, and COVID-19 phase 1, respectively.

7 ‘Musharakah’ instruments are loss-and-profit sharing and are similar to equity, where equity holders generally have more risk than debtholders. According to Shariah standards, the ‘Musharakah’ profit rate can be negotiated, but the loss rate must be in proportion to the investment (Athari, 2022; Athari et al., 2016; Azmat et al., 2016).

8 According to Baker and Wurgler (2007), investor sentiment refers to the ‘belief about future cash flows and investment risks that is not justified by the facts in hand’.

9 The descriptive statistics of the behavioural indices are available upon request.

10 They are listed as the G20’s largest countries and include the U.S., Germany, France, Italy, Spain, the UK, China, South Africa, Australia, Japan, India, Russia, South Korea, Turkey, Argentina, Brazil, and Indonesia.

11 https://coronavirus. ravenpack.com.

12 The results of the PCA are available upon request.