Low-frequency Volatility and Macroeconomic Dynamics: Conventional vs Islamic Stock Markets
Hong-Bae Kim
This study revisits the relationship between macroeconomic risk and low-frequency volatility of stock markets, albeit, making a comparison between conventional and Islamic stock markets from around the world. The study uses the novel approach of Rangel and Engle (2012) to extract ¡®lowfrequency¡¯ volatility from aggregate volatility shocks and then investigates whether this low frequency volatility can be explained by macroeconomic risk. Using a panel of 36 countries, representing developed, emerging and Islamic countries for the period from 2000 to 2016, the study finds that low-frequency market volatility is lower for Islamic countries( and) markets with more number of listed companies,(and) higher market capitalisation relative to GDP and larger variability in industrial production. The study also finds that low-frequency component of volatility is greater when the macroeconomic factors of GDP, unemployment, short-term interest rates, inflation, money supply and foreign exchange rates are more volatile. The empirical results are robust to various alternative specifications and split sample analyses. Our findings imply that religiosity has an influence on the correction of market volatility.