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The Organization of Islamic Cooperation (OIC) comprises several rapidly growing industries attracting large sums of foreign direct investments. The emerging nature of the markets and the rapid influx of investments bring about the question of how the stock markets in OIC member countries react to variations in the economy. The objective of this chapter is to understand the relationship between business cycles and stock market volatility within the OIC member countries for short-term traders and long-term investors. The results showed that most of the OIC countries, being oil rich and dependent, saw its business cycle and stock markets fluctuating owing to drops and increases in world oil prices. All the countries in the sample were affected by the global crisis.

As the primary role of the capital market is to allocate the economy’s resources, the fundamental need for an efficient market arises from the importance of efficient resource allocations, which in turn will help the economy. In light of the efficient market hypothesis (EMH), several studies have been undertaken over the past two decade, but very few have been on the Organization of Islamic Cooperation (OIC). This chapter focuses on analysing the weak-form efficiency of OIC member stock markets to determine their efficiency rankings during different business cycles. The results are indicative of improving efficiency over the past decade.

The chapter provides some background on business cycles. When discussing business cycles, it becomes necessary to define clearly recessions and expansions. The National Bureau of Economic Research (NBER) defines recession as a period between a peak and a trough, and expansion as a period between trough and a peak. Furthermore, the different types of cycles and theories associated with business cycles are discussed. A key theory that is relevant in this book is the Real Business Cycle (RBC) theory. According to the theory, changes in technology in the business sector cause the booms and bust of a business cycle.

Analysing the market integration is an important part of understanding the economic nature of a stock market as it tells us its relationship with world markets and its effect based on movements in other markets. Organization of Islamic Cooperation (OIC) member countries, with higher volatility and greater market instability, are of particular interest in understanding how their markets would react to global or regional news. This chapter will analyse comparatively with developed markets the market integration of OIC member countries with the world average as well look into its regional integration.

The chapter provides a detailed description of the Organization of Islamic Cooperation (OIC) and its stock markets. As the second largest regional bloc, the OIC is home to several rapidly emerging markets and natural resources-rich countries. Despite this, out of the 57 member countries, only 33 have an active stock exchange. In these, there are significantly lower domestic companies listed as compared to other developing and emerging markets. Less liquid markets bring about an increased volatility, and an increased volatility is reflective of both shallowness and a lack of integration with global markets, indicating the main problem with OIC stock markets.

The unstable nature of business cycles makes it necessary to study the relationships between stock performance and economic activity. Novel to this multifaceted mix are Islamic equity markets which have witnessed tremendous growth over the last decade. This suggests a causal relationship between the performance of the stock market and business cycles. This study attempts to analyse the relationship between the volatility of Islamic stock indices and business cycles and assess how Islamic stock fairs compared with conventional stock indices. Spanning over 10 years, our results indicate that across regions, Islamic indices appeared to be more volatile during times of economic downturn and less volatile during the growth phase of a business cycle.