Title: Return volatilities and contagion transmission between Islamic and conventional banks throughout the subprime crisis: evidence from the DCC-MGARCH model

Authors: Mohamed Fakhfekh; Nejib Hachicha

Addresses: Unité de recherche CODECI, Faculté des Sciences Economiques et de Gestion de Sfax, Université de Sfax, Route de l'aéroport, Km 4, 3018, Sfax, Tunisia ' Unité de recherche CODECI, Faculté des Sciences Economiques et de Gestion de Sfax, Université de Sfax, Route de l'aéroport, Km 4, 3018, Sfax, Tunisia

Abstract: The financial markets' deregulation and globalisation have highlighted the banking systems' fragility in the presence of financial crises. Indeed, both conventional and Islamic banks have been affected by the recently witnessed international financial crisis. In this context, an attempt has been undertaken throughout the present work in a bid to test whether the Islamic banking return volatilities undergone during the last financial crisis might have its explanations in the contagion effect. For this purpose, the DCC-MGARCH model has been applied to estimate the conditional dynamic correlations prevailing between Islamic and conventional banking returns. Using a test of Van Royen, the results have shown that these correlations between the returns of both bank types have increased between the quiet period and the crisis period. This finding implies that contagion has been a major source of the decline witnessed in the Islamic banks' returns.

Keywords: Islamic banks; conventional banks; financial crisis; DCC-MGARCH; return volatilities; contagion transmission; Islamic finance; subprime crisis; financial crisis.

DOI: 10.1504/IJMFA.2014.064518

International Journal of Managerial and Financial Accounting, 2014 Vol.6 No.2, pp.133 - 145

Received: 11 Jan 2014
Accepted: 23 Jul 2014
Published online: 23 Oct 2014 *

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