Global factors driving structural changes in the co-movement between sharia stocks and sukuk in the Gulf Cooperation Council countries

In this paper, we investigate the volatility spillovers between sukukand sharia-compliant stocks in GCC countries. A multivariate Frac-tionally Integrated Asymmetric Power ARCH model with dynamicconditional correlations (DCC) is estimated under Student-t dis-tribution. We provide strong evidence of persistence behavior insukuk and sharia stock volatilities and a time-varying negativecorrelation. Using the Bai and Perron (2003. Journal of Applied Econo-metrics, 18, 1) test, we uncover structural breakpoints in the DCCspath corresponding to extreme external events including the fail-ure of Lehman Brother’s on September 2008. Such extreme eventshave increased the magnitude of the dynamic correlations betweensharia-stocks and sukuk. We estimate a modified DCC model withexogenous variables (DCCX), which allows for exogenous variablesto impact the behavior of the DCC over time. We find significantbehavioral shifts in the sukuk/sharia stock relationship, which can be explained by market liquidity, U.S. CDS spreads and crude oilprices. Our findings provide useful implications for Islamic fundmanagers operating in the GCC markets as well as for GCC poli-cymakers.