Volatility transmission within financial markets during the COVID-19 pandemic: are faith-based investors well off in Tunisia?

Purpose This paper aims to investigate the risk-return and volatility spillover within the Tunisian stock market during the COVID-19 pandemic analyzing both the Islamic and conventional stocks’ performance. Design/methodology/approach Both symmetric (GARCH and GARCH-M) and asymmetric (Threshold GARCH and Exponential GARCH) models are used to analyze the market returns and volatility response. Standard and Poor’s (S&P) index has been used to test both the Islamic and conventional stocks within the Tunisian stock market. Findings The findings suggest that both Tunisia Islamic and conventional stock markets are highly persistent; however, the conventional stock index showed a negative return spillover on the Islamic stocks during the pandemic. The conventional stock index has also shown a higher exposure to risk for a lower amount of return, and evidence of potential diversification benefit between both indexes was found during the pandemic, whereas the Islamic market showed a positive leverage effect, indicating a positive correlation between past return and future return; the conventional index implied a negative leverage effect. Originality/value The value of this paper emerges in studying three main aspects that are specific to the Tunisian stock market. This includes COVID-19 effect of return spillovers, volatility transmission across both conventional and Islamic stock market within the local financial market.

Risk allocation with Shapley value in the risk aggregation framework

The topic of risk aggregation arises from the need to incorporate in a single measure the overall exposure to the different risk types. In general, the methodologies adopted for the purposes of risk integration are based on the principle that the overall economic capital is lower than the simple algebraic sum of economic capital measures related to individual risks. This phenomenon, due to the existence of an imperfect correlation between the risks, determines, in line with portfolio theory, a "diversification benefit". The issue of risk allocation subsequently arises when the risk value of the diversified aggregated loss needs to be reassigned to the different risk classes. A similar issue has been solved in the framework of cooperative Game Theory, where the Shapley value provides a player-specific contribution of the total surplus generated by the coalition. The paper proposes a novel application of the Shapley formula in the ICAAP context (Pillar II - economic view). In particular, we show that the Shapley value is the unique solution to the allocation problem of an overall risk value, granting the fundamental requested properties, including the efficiency one. An exemplificative model application is reported, as well as a comparison with a benchmark methodology. The experimental part shows the advantages of the novel approach in terms of precision and reliability of the estimates. Finally, it is important to mention that the presented framework can be applied also in other contexts such as, for instance, in the risk class attribution of the operational risk.

Islamic stock-sukuk indexes' correlations: does financial uncertainty matter?

PurposeThis study examines co-movements between global Islamic index and heterogeneous rated/maturity sukuk. It tests the impact of financial uncertainty on these movements.Design/methodology/approachFirstly, we conduct a bivariate wavelet analysis to assess the co-movements between stocks and sukuk indexes. Secondly, we use General dynamic factor model and stochastic volatility to construct financial uncertainty index from Islamic stock indexes. Finally, we run regression analysis to determine the impact of uncertainty on the obtained correlations.FindingsOur results suggest the absence of flight to quality phenomenon since correlations are positive especially at a short investment horizon. There is evidence of contagion phenomena across assets. Financial uncertainty may be considered as a determinant of stock-sukuk co-movements. Our results show that a rise in financial uncertainty induces correlation to move in the opposite direction in the short term, (exception for correlation with AA-Rated sukuk). However, the sign of stock market uncertainty becomes positive in the long term, which leads sukuk and stocks to move in the same direction (exception for 1–3 Year and AA Rated sukuk).Practical implicationsInvestors may combine sukuk with 1–3 Year maturity and AA Rated when considering long holding periods. Further, all sukuk categories provide diversification benefit in time high financial uncertainty expectation for AA Rated sukuk when considering short holding periods.Originality/valueTo the best of our best knowledge, our study is the first investigation of the impact of financial uncertainty on Stock-sukuk co-movements and provides recommendation considering sukuk with different characteristics.

The Impact of Noninterest Income on the Profitability of Commercial Banks in VietNam: Evidence of Non-Linear Relationship

This paper uses the Generalized Method Of Moments (GMM) to analyze the impact of noninterest income on the profitability of 28 Vietnamese commercial banks in the period from 2010 to 2018. At the same time, the Threshold Regression Model is applied on a panel data to evaluate whether or not there is a non-linear relationship between the noninterest income ratio and bank’s profitability. The results have shown that the optimal diversification benefit can be attained by reaching a certain level of non-interest income proportion. The findings of the study are: (1) The existence of two thresholds shows that there is non-linear relationship, confirming the non-linear relationship between the noninterest income ratio (NII) and profitability (ROA); (2) The noninterest income ratio impacts negatively on profitability (ROA) when NII (≤44.16% and ≥ 46.62%), when the noninterest income ratio is between 44.16% and 46.12% the relationship is positive. The noninterest income ratio ranging from 44.16% to 46.62% is called optimal when this ratio is in a positive correlation with profitability, which means that Vietnamese commercial banks can try to increase their profits by increasing NII and maintaining that level to get exploiting their maximum level of diversification from noncredit income.

Oil as Hedge, Safe-Haven, and Diversifier for Conventional Currencies

The research investigates the safe-haven, hedging, and diversification function of crude oil for conventional currencies, among which five are major oil exporters, and six are major oil importers. In order to model time-varying dynamic correlations between crude oil and currencies, the study uses the Asymmetric-DCC model. The findings highlight low or negative correlations, especially during the crisis period. Next, we employ a quantile based regression framework and conclude distinct safe-haven and hedge functions of oil for major currencies. We provide additional evidence on the safe-haven, hedging, and diversification function of crude oil using the cross-quantilogram framework. The findings of out of sample analysis illustrate that the hedging effectiveness of oil is greater for oil-exporting countries. In addition, the conditional diversification benefit of oil is higher in the lower quantiles, i.e., when both foreign exchange and oil markets are in a bearish state. Finally, implications for investors, portfolio managers, and policymakers are further discussed.