Reexamining the oil price & islamic finance relationship: a multicriteria time series analysis

Abstract

Our study revisits the relationship between oil prices and Islamic finance over the last two decades for developed and emerging countries through a multicriteria time series approach. Specifically, we assess this relationship during turbulent times, considering the effect of recent healthcare shock and oil price shock caused by the coronavirus disease (COVID-19) pandemic and war in Ukraine, respectively. Therefore, we built an Autoregressive Distributed Lag (ARDL) specification using multicriteria time series tests that dealt with variables that did not require any transformation (detrending, stationarity, etc.), allowing us to use maximum available information. Our results reveal two interesting findings. First, although the oil sector has a significant impact on Islamic stock indices, there is a lack of evidence regarding a cointegration relationship, suggesting the absence of a long-term relationship and therefore a mean reversion between these two markets, particularly in developed countries. Second, since COVID-19, a mean reversion in the Islamic stock market (for both developed and emerging countries) has occurred, suggesting the presence of a cointegration relationship and active adjustment mechanism. The channel of investor behavior and market anxiety appears to drive this error correction mechanism. These findings indicate oil price–Islamic finance integration and market inefficiency.