The Impact of Subprime Crisis on Asia-Pacific Islamic Stock Markets

The objective of this study is to examine the impact of Subprime Crisis on the long-term and short-term dynamic relationships between selected Asia-Pacific Islamic Stock Markets and leading conventional stock markets. The co-movement among the United States, Japan, China, Malaysia, Indonesia stock markets, both Islamic and Conventional, is examined from February 1, 2006 to December 31, 2010. This study applies rigorous empirical testing, including Vector Autoregression (VAR) method to examine the long-run and short-run dynamics, and Vector Error Correction Model (VECM) to explore the dynamic co-movement. To extend the previous study, firstly, China’s Islamic Stock Market is included in the test; secondly, the performance of the conventional stock markets from these five countries is also taken into account. The study reveals that at the pre-crisis period, investors find that there are diversification benefits of diversifying their portfolio in the Asia-Pacific Islamic Stock Markets and