Intersectoral correlations and spillover effects in Indonesia’s sharia-compliant capital market: A TVP-VAR analysis during pre-pandemic and pandemic phases

Abstract

This study examines the intersectoral stock return linkages of the Indonesian sharia-compliant capital market under pre-pandemic and pandemic times. The closing prices on a daily basis, which were retrieved from Bloomberg Terminal, were estimated through the use of the Time Varying Parameter Vector Autoregressive (TVP-VAR) model in tandem with the Diebold and Yilmaz (2014) connectedness approach, with computation being done through RStudio. Results indicate a dramatic rise in sectoral return correlations during the pandemic, along with large spillover effects. The Consumer Cyclicals sector was the largest risk transmitter, and the Property and Real Estate sector was the largest risk receiver. These results highlight the significance of sectoral interdependencies, with important implications for investors in managing cross-sector risk and policymakers in crafting effective financial regulations.