Islamic versus conventional stock market and its co-movement with crude oil: a wavelet analysis

Crude oil market plays an important role in economic development and its price changes give huge impact to the financial markets. In this paper, the relationships between crude oil and stock markets are examined. This study has selected Malaysian Islamic and conventional stock markets as a case study. Financialisation of crude oil and its frequent inclusion into investment portfolios warrant an analysis of the relationship between crude oil and stock market indices at various time scales or investment horizons. Therefore, this paper applies wavelet decompositions to unveil the multi-horizon nature of co-movement and employ daily closing price data of Brent crude oil index and Malaysian Shariah and conventional stock market indices. The results mainly show an evidence of a low degree of co-movement between crude oil prices and Malaysian stock market returns for short term and medium term. However, for the long term, it shows that there is a significant co-movement for crude oil – stock market relationship. Interestingly, Malaysia Islamic stock market and conventional stock market are highly correlated and both show similar patterns for crude oil price comovements. The findings of this study are of crucial importance for the investors for exploring their diversification benefits as well as for the timing of their investment and disinvestment purposes