Information Flow from COVID‐19 Pandemic to Islamic and Conventional Equities: An ICEEMDAN‐Induced Transfer Entropy Analysis

Abstract

With the steady growth in the data set on the COVID-19 pandemic, empirical works that employ novel and yet appropriate statistical techniques to corroborate previous findings of the pandemic and its consequences on financial markets are necessary. This paper examined the impact of COVID-19 information flow on the Islamic and conventional equities within the short-, mid-, and long-term horizons to assess possible diversification prospects in the era of the pandemic. To the studied equities markets, a novel technique based on a denoised frequency-domain entropy paradigm was applied. The operability of entrenched market dynamics in the long-term horizon of the COVID-19 pandemic period is reinforced by the results. The findings divulge diversification opportunities between Islamic and conventional equities in the short- and mid-term periods of the COVID-19 pandemic. The risks on equities from Japan or Bahrain could be diversified by equities from Jordan in the short-term, while in the intermediate-term stocks from Japan could diversify with the UAE and USA equities. The results imply that it is imperative for investors and fund managers to employ portfolio management techniques that show how to use benefits together with risk prevention and management across distinct time scales.

Spillovers and contagion between BRIC and G7 markets: New evidence from time-frequency analysis

“…The DY-12 spillover index rather assumes a time-invariant connectedness between assets, suggesting that investors respond to spillovers similarly and that their response is unaffected by investment horizons. This is contrary to the heterogeneous markets hypothesis (HMH) [ 23 – 25 , 33 ] and adaptive market hypothesis (AMH) of Lo [ 22 ]. To get around this restriction, we employ the BK-18 spillover index, which is based on heterogeneous shock frequency responses.…”

“…Heterogeneous and time-based investor behaviour is reflected in market pricing since the market does not function in solitude. Theories that support this occurrence are Lo’s [ 22 ] AMH and the HMH recently propagated by Adam, Gyamfi, Kyei, Moyo, and Gill [ 25 ], Bossman [ 23 ], Bossman et al [ 24 ], and Owusu Junior, Frimpong et al [ 34 ]. By analysing historical and present events, the HMH hypothesises that distinct economic actors make investment decisions over different time horizons depending on their risk and return preferences.…”

“…In a static spillover paradigm, Zhang et al [ 27 ] analyse the connectedness of G7 and BRIC economies. However, the operability of markets and investor behaviour are shown to follow dynamic patterns and, hence, evidence from static connectedness measures may be insufficient for time-based investors operating across the short-, medium-, and long-term periods [ 5 , 11 , 23 – 25 , 34 ]. Analysis of safe-haven assets [ 39 ], risk-aversion comovements [ 40 ], spillovers dynamics between developed and emerging economies, and commodity futures [ 28 ] have all been studied with much emphasis on G7 markets and to some extent, BRIC economies.…”

“…This study examines the matter of spillovers and contagion effects between the BRIC index and its members, and the G7 markets while taking into account the impacts of the adaptability [ 22 ] and heterogeneity [ 23 – 25 ] of market participants, non-linearity and asymmetric qualities (of spillovers) that have not been properly considered in prior studies. As a result, the primary goal of this research is to look at the time-varying spillovers between those four fast-growing nations, their market bloc index, and the group of seven (G7) major developed stock markets.…”

“…International investors are particularly interested in the idea of BRIC replacing the G7 as a major source of international risks since this might lead to extended market integration which may alter investment, speculation, and risk diversification options [ 27 ]. Assessments of cross-market linkages covering past financial crises may have minimal effects on portfolio management owing to the distinct nature of recent systemic crises [ 13 , 23 , 24 ]. As a result, focusing on the time-varying dynamics of cross-market linkages in periods such as the EDC, Brexit, the US-China trade tension, and the financial market meltdown in the COVID-19 era is essential to understand emerging trends in financial markets.…”