The linear and non-linear interactions between blockchain technology index and the stock market indices: a case study of the UAE banking sector

Abstract

Purpose This paper aims to investigate the linear and nonlinear interactions between the blockchain technology index and the UAE stock market index within the context of the Abu Dhabi and Dubai banking sector. Design/methodology/approach In this study, linear analysis was performed using the generalized autoregressive conditional heteroscedasticity model (GARCH) (1,1) model, whereas nonlinear analysis was performed using the wavelet coherence model. Findings Based on the results of the GARCH (1) model, the authors find that the blockchain technology index has a positive significant impact on stock market returns in the Abu Dhabi and Dubai banking sector. In addition, the findings indicate that increasing blockchain integration in the banking industry decreases banks’ stock market volatility and facilitates price stabilization. Additionally, the coherence wavelet analysis reveals that there is a phase relationship between the blockchain technology index and banks’ stock market indices in the banking sector of the UAE. The association was stronger during the global pandemic crisis because they were moving together across different timescales. Practical implications With the help of the linear analysis, this study offers a focal point and valuable insights to policymakers, central banks and commercial banks management on how implementing blockchain technology in the banking industry help boost stock market returns, reduce volatility and facilitate price stability. As a result of the nonlinear analysis of the significant long-term degree of co-movement between blockchain technology and banks’ stock markets in UAE, policymakers or the management of banks in UAE should take the growth of the blockchain technology industry into consideration to ensure the continued development of the banking sector. For investors, the findings provide implications for portfolio managers operating in the UAE who are encouraged to take short-term co-movement into account (1–16-week horizons) through both frequency and time when designing their portfolio while keeping long-horizon periods in mind is not recommended. Originality/value It is a pioneering study that empirically examines the linear and nonlinear nexus between the blockchain technology index and banks’ stock market returns and price stability.