Volatility spillover and dynamic correlation between Islamic, conventional, cryptocurrency and precious metal markets during the immediate outbreak of COVID-19 pandemic

Abstract

Purpose

This paper aims to investigate the immediate effect of the outbreak of the COVID-19 pandemic by investigating volatility transmission and dynamic correlation between stock (conventional and Islamic) markets, bitcoin and major commodities such as gold, oil and silver at different investment horizons before and after 161 trading days of the outbreak of the COVID-19 pandemic.

Design/methodology/approach

The MGARCH-DCC and maximum overlap discrete wavelet transform -based cross-correlation were used in the estimation of the volatility spillover and continuous wavelet transform in the estimation of the time-varying volatility and correlation between the assets at different investment horizons.

Findings

The authors observed a sudden correlation breakdown following the COVID-19 shock. Oil (Bitcoin) was a major volatility transmitter before (during) COVID-19. Digital gold (Bitcoin), gold and silver became highly correlated during COVID-19. The highest co-movement between the assets was observed at medium and long-term investment horizons.

Practical implications

The study findings have a financial implication for day traders, investors and policymakers in the understanding of volatility transmission and intercorrelation in a bid to actively manage stylized and well-diversified asset portfolios.

Originality/value

This study is unique for its employment in estimating the time-varying conditional volatility of the investable assets and cross-correlations between them at different investment horizons, particularly before and after COVID-19 outbreak.

Citation

Karim, M.M., Noman, A.H.M., Hassan, M.K., Khan, A. and Kawsar, N.H. (2024), "Volatility spillover and dynamic correlation between Islamic, conventional, cryptocurrency and precious metal markets during the immediate outbreak of COVID-19 pandemic", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 17 No. 4, pp. 662-692. https://doi.org/10.1108/IMEFM-02-2023-0069