Islamic financial markets response to uncertainty: an application of quantile-on-quantile approach

Purpose - The purpose of the research is to analyze the impact of world uncertainty and pandemic uncertainty on Islamic financial markets. For representing Islamic financial markets four different Islamic indices (DJ Islamic index, DJ Islamic Asia–Pacific index, DJ Islamic-Europe index and DJ Islamic-US) are taken. Design/methodology/approach - The study employs quantile-on-quantile regression approach to see the overall dependence structure of variables based on quarterly data ranging from 1996Q1 to 2020Q4. This technique considers how quantiles of world uncertainty and pandemic uncertainty asymmetrically affect the quantiles of Islamic stocks by giving an appropriate framework to apprehend the overall dependence structure. Findings - The findings of the study confirm a strong negative impact of world uncertainty and world pandemic uncertainty on regional Islamic stock indices but the strength of the relationship varies according to economic conditions and across the regions. However, the world pandemic effect remains the same and does not change. Conversely, pandemic uncertainty has a larger effect on Islamic indices as compared to world uncertainty. Practical implications - Our findings have significant implications for investors and policymakers to take proper steps before any uncertainty arise. A coalition of the central bank, government officials and investment bank regulators would be needed to tackle this challenge of uncertainty. Originality/value - To the best of the authors' knowledge, none of the current works has considered the asymmetric impact of world and pandemic uncertainties on Islamic stock markets at both the bottom and upper quantiles of the distribution of data.