The Stability of Islamic Banks During the Subprime Crisis

19 Pages Posted: 21 Dec 2009 Last revised: 19 Mar 2012

See all articles by Aniss Boumediene

Aniss Boumediene

affiliation not provided to SSRN

Jerome Caby

ICN Business School

Date Written: December 17, 2009

Abstract

This empirical study examines the stability of Islamic banks during the subprime crisis. It covers a sample of fourteen Islamic banks and fourteen conventional banks. The conditional variance (volatility) of returns was used to measure stability. The E-GARCH and GJR-GARCH asymmetric models were used to estimate volatility due to their ability to take into account the leverage effect. The results of this study show that conventional bank returns were highly volatile during the crisis period, while Islamic banks saw their volatility - initially low - increase during the crisis, though to a much more moderate extent. These results corroborate both the hypothesis that Islamic banks were at least partially immune to the subprime crisis and the underlying hypothesis that Islamic banks are not subject to the same risks as conventional banks - although, due to their links with the real economy, they do eventually suffer the consequences of the subprime crisis.

Keywords: islamic banks, financial stability, subprime crisis, volatility, leverage effect

JEL Classification: G12, G15, G21

Suggested Citation

Boumediene, Aniss and Caby, Jerome, The Stability of Islamic Banks During the Subprime Crisis (December 17, 2009). Available at SSRN: https://ssrn.com/abstract=1524775 or http://dx.doi.org/10.2139/ssrn.1524775

Aniss Boumediene (Contact Author)

affiliation not provided to SSRN

Jerome Caby

ICN Business School ( email )

13 rue du Marechal Ney
Nancy, 54000
France

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