Islamic Stock Market Performance in the Era of the COVID19 Crisis : An Empirical Study Using the GARCH Model

Abstract

Islamic Investment (IS) or Sharia-compliant Investment (ICC), is a new kind of ethical investment that emerged in the twentieth century. It is a cost-effective option for investors who want to make their money available only to businesses that follow the Islamic religion's guidelines. However, in empirical research on the growth of these financial assets, the question of their performance remains the determining point that spills much ink. Having an interest in the performance of Islamic assets entails examining them from both a financial and non-financial aspect (Serret 2003). So, our study is therefore in line with this perspective aimed at analyzing the Islamic stock market's performance.

Given that volatility, which is synonymous with risk, has a significant impact on performance, our ultimate goal is to find an answer to these questions: How and to what extent the COVID-19 issue influenced the volatility of Islamic stock indexes? And have they been less volatile and, therefore, better performing than conventional stock market indexes? The contribution of our study to the current empirical review lies in the use of econometric modeling using the GARCH model to analyze and compare the conditional variance of stock market indices. The study was conducted on a daily database from January 1, 2019, to December 31, 2021, for four Islamic and conventional stock indexes. Two represent the global stock indexes (DJIM and GDOW) and two present the US indexes (IMUS and DWCF). Our study allowed us to conclude that the global Islamic stock index was more volatile and therefore riskier than its counterpart during the period of a health crisis, while the opposite was observed for the US indices. However, in periods of low tension, no preference can be given to one type of index over the other in terms of volatility. All these observations lead us to confirm that the question of the over or under-performance of one type of index compared to the other is not absolute. It is rather dependent on the degree and nature of the shock attacking the country under study.

JEL Classification : C01, C22, G01, G15

Paper type: Empirical research