Realized volatility transmission within Islamic stock markets: A multivariate HAR-GARCH-type with nearest neighbor truncation estimator

• Main Authors: Sew Lai Ng, Wen Cheong Chin, Lee Lee Chong
• Format: Article
• Language: English
• Published: Elsevier 2020-12-01
• Series: Borsa Istanbul Review
• Subjects: C32; C58; G1
• Online Access: http://www.sciencedirect.com/science/article/pii/S2214845020300612

Using the nearest neighbor truncation (NNT) approach, this study investigates the realized volatility transmission between the Malaysian Islamic market with various global sectoral Islamic stock markets by extending the heterogeneous autoregressive (HAR) with GARCH, asymmetric effects and jump-robust volatility estimator established in a multivariate setting. The multivariate HAR-GARCH model is capable to capture the persistence and time-varying volatility of realized volatility while NNT approach allows for an asymptotic limit theory in the presence of jumps. Using intraday data, the findings suggest the daily realized volatilities of the Islamic equities rely significantly on their own short-, mid- and long-term volatility components. Besides, there is an evidence of volatility spillover in majority of the pairwise but with low magnitude. The findings also confirm the vital role of conditional heteroscedasticity in the volatility series in explaining the measured volatility transmission of the Islamic stock indices. Hence, this study provides useful insight to understand the portfolio risk of Shariah-compliant equities in making better-informed portfolio allocation.