TY - JOUR

T1 - Co-Movement and Information Transmission Between Conventional and Islamic Equities in Sri Lanka

AU - Hussainey, Khaled

AU - Riyath, Mohamed

PY - 2025/3/4

Y1 - 2025/3/4

N2 - PurposeThis study aims to investigate the co-movement and information transmission between conventional and Islamic equity indices in Sri Lanka.Design/methodology/approachThis study uses daily data of All Share Price Index and Dow Jones Islamic Market Sri Lanka Index from 2013 to 2023 for conventional and Islamic proxies. Descriptive statistics, cross-correlation, dynamic conditional correlation (DCC)-GARCH and wavelet analysis were used for the investigation.FindingsAnalyses reveal synchronous correlation yet lead-lag dynamics between the indices. The Islamic index has lower volatility, clustering and persistence than the conventional index. Localized volatility patches and scale-dependent synchronicity suggest diversification opportunities to optimize risk-adjusted returns.Research limitations/implicationsThe insights from this study are important for investors to optimize diversified portfolios by exploiting time-varying correlations. The identified lead-lag dynamics, bidirectional information flows and scale-dependent synchronization between the indices enable both investors to predict market movements for effective asset allocation and regulators to monitor market efficiency and stability and implement shock mitigation measures.Originality/valueThis study uniquely integrates DCC-generalized autoregressive conditional heteroskedasticity (GARCH) and wavelet analysis to examine the dynamic, time-varying relationships between Islamic and conventional equity markets in Sri Lanka’s dual financial system. This approach helps embrace both short-run changes and long-run movements to gain in-depth co-movement and spillovers, as well as potential diversification gains within an emerging financial market.

AB - PurposeThis study aims to investigate the co-movement and information transmission between conventional and Islamic equity indices in Sri Lanka.Design/methodology/approachThis study uses daily data of All Share Price Index and Dow Jones Islamic Market Sri Lanka Index from 2013 to 2023 for conventional and Islamic proxies. Descriptive statistics, cross-correlation, dynamic conditional correlation (DCC)-GARCH and wavelet analysis were used for the investigation.FindingsAnalyses reveal synchronous correlation yet lead-lag dynamics between the indices. The Islamic index has lower volatility, clustering and persistence than the conventional index. Localized volatility patches and scale-dependent synchronicity suggest diversification opportunities to optimize risk-adjusted returns.Research limitations/implicationsThe insights from this study are important for investors to optimize diversified portfolios by exploiting time-varying correlations. The identified lead-lag dynamics, bidirectional information flows and scale-dependent synchronization between the indices enable both investors to predict market movements for effective asset allocation and regulators to monitor market efficiency and stability and implement shock mitigation measures.Originality/valueThis study uniquely integrates DCC-generalized autoregressive conditional heteroskedasticity (GARCH) and wavelet analysis to examine the dynamic, time-varying relationships between Islamic and conventional equity markets in Sri Lanka’s dual financial system. This approach helps embrace both short-run changes and long-run movements to gain in-depth co-movement and spillovers, as well as potential diversification gains within an emerging financial market.

U2 - 10.1108/RAF-10-2023-0357

DO - 10.1108/RAF-10-2023-0357

M3 - Article

JO - Review of Accounting and Finance

JF - Review of Accounting and Finance

SN - 1475-7702

ER -