Spillover and risk transmission between the term structure of the US interest rates and Islamic equities

Abstract

This study examines the spillover between the US yield curve components and return and volatility spillovers of ten Islamic equity sectoral indices. Our static analysis shows that level factor of the yield curve as well as sectorial equities of Basic Materials, Industrials, Consumer goods and Consumer services are the main transmitter, whereas the slope and curvature factor of the yield curve along with sectorial equities of Oil and Gas, Financials, Healthcare, Technology, Telecom and Utilities are the main recipient of both return and volatility spillover. Our dynamic spillover analysis reveals that the total return and volatility spillovers indices rapidly rise after the start of the different crises and then fall afterward. Our pairwise analysis shows that yield components are main transmitter of volatility spillover to Utilities, Telecom, Technology and Financials. The identification of net transmitter and receiver of spillover has important portfolio choice and risk management implications. These findings are helpful for investors, Shariah advisors, and policy makers in formulating their decisions in terms of portfolio strategy, risk management, Shariah codes, and monetary policy.