Regime-dependent relation between Islamic and conventional financial markets

The aim of this paper is to examine regime-dependent dynamic relation between Islamic and conventional financial markets by means of Markov Switching Vector Autoregression (MS-VAR). Empirical results suggest evidence in favor of regime-switching properties in all returns series. These findings provide strong evidence in favor of nonlinear relation between the conventional and Islamic stock markets and thus, it is necessary to employ the MS-VAR models to determine the dynamic relationship between series. The regime-dependent Granger causality test and impulse-responses analysis results suggest that Islamic stock market is affected from conventional stock markets in both the bear and bull markets regimes. Therefore, the idea that Islamic financial markets provide diversification benefits and they are safe havens during financial distressed periods cannot be supported empirically.