Do Islamic Equity Indices Hedge Against Crypto Market Shocks? Evidence from Time-Frequency Connectedness and Wavelet Cointegration

This study examines the Islamic equity indices in respect of cryptocurrency market shocks through more sophisticated time-frequency connectedness and wavelet cointegration models. The research question of this study is whether the benefits of the Islamic equity indexes to act as effective hedge against cryptocurrency market shocks are realized using the time frequency framework. The previous data (4 November 2020 to 4 March 2025) of USD-denominated daily closing prices of Bitcoin (BTC/USD), Ethereum (ETH/USD), and the chosen Islamic equity indices were gathered and cleaned up to produce synchronized daily observations. All series were calculated in terms of logarithmic returns. Continuous Wavelet Transform (CWT) was used in the analysis with Morlet mother wavelet to evaluate time-frequency co-movements and lead-lag. The Diebold Yilmaz connectedness model was used to estimate dynamic spillovers through generalized forecast error variance decomposition of a VAR model. Johansen cointegration tests were used to test long-run relationships. Conditional covariances estimated with the help of DCC-GARCH model were used to compute time-varying hedge ratios. The findings show that the relationship between cryptocurrencies and Islamic equity indices is sensitive to regimes and frequency. The effectiveness of hedges is also greater at shorter horizons and in times of high volatility events. Nevertheless, safe-haven properties are minimized in the long-run due to long-run integration. The results indicate the contingent and time dependent quality of the Islamic equity hedging effectiveness against cryptocurrency shocks.