Dynamic Interconnectedness Between Islamic and Conventional Stocks in GCC Economies: Application of TVP-VAR Analysis

The size of Islamic finance has become one of the most important sources of the global financial system, and its growth potential has necessitated a detailed market analysis. In this study, Islamic markets are analyzed by comparing them with conventional markets to determine whether they act differently from other financial products in times of crisis and protect their investors, that is, whether they act as a haven. The extent to which Islamic and conventional stocks experience connectedness during crisis periods, their aggregate dynamic connectedness structure, and which markets transmit or receive the most shocks have prompted this research. This study examines the dynamic connectedness structure between Islamic and conventional stocks in Gulf Cooperation Council (GCC) economies using daily data from 23.06.2015- 8.08.2024 through the TVP-VAR model. The research also includes additional analyses for investors with a short-term and long-term investment approach. For the markets examined, the degree of short-term and long-term connectedness is analyzed to determine whether the market is a transmitter or a receiver of shocks. For this purpose, forecast horizons are modelled for short-term (frequencies in the 1-5 day period) and long-term (frequencies in the period longer than 5 days). According to the findings on frequency connectedness, short-run rather than long-run transmission is the primary source of connectedness in both markets. The connectedness in Islamic and conventional markets has a similar structure during periods when risk decreases and increases. Total connectedness increased during the 2015-2016 oil crisis, the 2020 COVID-19 period, the February 2022 Russia-Ukraine war, and the October 2023 Israel-Palestine war, and the market's receiver or transmitter positions changed. Conventional markets have a higher level of connectedness than Islamic markets. However, this level is not strong enough to support the view that Islamic markets protect investors and national economies in times of crisis and offer a safe harbour effect.