The vicissitudes of stock markets and business cycles: focusing on the OIC region

Abstract

The tremendous growth of emerging and developing markets brings forth new arenas of research. One untouched region is the study of business cycle comovements with stock market volatility within the Organization of Islamic Cooperation (OIC) member countries. The OIC comprises of several rapidly growing industries attracting several Foreign Direct Investments. The emerging nature of the markets and the rapid influx of Foreign Direct Investment bring about the question of how business cycles in the OIC member countries react to variations in the stock market. Taking 11 OIC member countries, we first derive their business cycle using the Christiano–Fitzgerald filter and then compare this to the decomposed (using wavelet) stock market volatility (using exponential generalized autoregressive conditional heteroscedasticity (EGARCH)) representing two timescales, short-term and long-term, to see the impact of business cycle phases on short-term and long-term traders. We find for several of our countries that stock markets remain volatile during economic growth and increase in volatility during recession periods.

Keywords:

• business cycle
• wavelet
• OIC
• volatility
• decomposed

JEL classification:

• O16
• C87
• E32

Additional information

Notes on contributors

Shaista Arshad

Shaista Arshad is pursuing her PhD in Islamic Finance at IIUM Institute of Islamic Banking and Finance Kuala Lumpur, Malaysia. She is also lecturing at University Kuala Lumpur.