Can Islamic Financial Markets Maintain Its Elegance Amidst the Waves of the Fourth Industrial Revolution?

Abstract

Islamic financial assets adhere to the principles of Shariah, which serve not only as constraints but also as protective mechanisms. However, in the wave of alternative investment opportunities brought about by the Fourth Industrial Revolution (FIR) and the impact of pressure events, building an investment portfolio based on Islamic financial assets still remains challenging. This paper uses a Quantile VAR (QVAR) connectedness framework that considers frequency domains to investigate the return spillover between Islamic financial assets and various FIR assets from April 30, 2018, to September 8, 2023. The results indicate that: (1) From a median perspective, the overall and short-term connectedness are 58.41% and 45.72%, respectively, suggesting a relatively close association between Islamic financial markets and FIR markets. (2) The outbreak of COVID-19 and the release of Chatgpt4.0 led to connectedness surpassing 65% across all quantiles, pushing the spillover to higher peaks. (3) The storm led by Chatgpt has had a more pronounced longer-term impact on the system compared to the pandemic and the Russia-Ukraine conflict. (4) In terms of spillover roles, Islamic stocks have been more proactive in embracing the FIR, while Islamic bonds tend to play a more passive role.