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Resilience of Islamic and conventional stocks to geopolitical conflict: A GARCH model analysis

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  • Fuad Hasyim
  • Moh. Nurul Qomar
  • Husny Gibreel Musa Saleh

Abstract

Purpose – This study examines the volatility behavior and resilience of conventional and Islamic stock indices in Indonesia during periods of geopolitical uncertainty, focusing on the Israeli–Palestine conflict.Methodology – This study employs the GARCH(1,1) model to examine the volatility dynamics of four major stock indices: the Jakarta Composite Index (JKSE), LQ45, the Indonesia Sharia Stock Index (JKISSI), and the Jakarta Islamic Index (JII). The analysis covers the period from January 1, 2023, to July 31, 2024, enabling an evaluation of market dynamics before, during, and after the conflict on October 7, 2023.Findings – The results show that conventional indices (JKSE and LQ45) exhibit significant volatility persistence, suggesting a higher susceptibility to prolonged instability during geopolitical tensions. Conversely, the Islamic indices (JKISSI and JII) are more responsive to recent market shocks, indicating greater resilience owing to ethical investment principles that avoid high-risk sectors. Furthermore, this study finds that external macroeconomic factors generally do not significantly influence stock market volatility in Indonesia.Implications – This may be due to the predominance of internal factors and local market dynamics over external global shocks, reflecting the Indonesian market’s less integrated nature in the global financial system. These findings offer valuable insights for investors and policymakers in managing risk and optimizing portfolio strategies amid geopolitical stress.Originality – This study contributes to the growing body of literature on the comparative analysis of conventional and Islamic investments in emerging markets.

Suggested Citation

  • Fuad Hasyim & Moh. Nurul Qomar & Husny Gibreel Musa Saleh, 2024. "Resilience of Islamic and conventional stocks to geopolitical conflict: A GARCH model analysis," Asian Journal of Islamic Management (AJIM), Center for Islamic Economics and Development Studies [P3EI], vol. 6(2), pages 122-139.
    • Handle: RePEc:uii:jrajim:v:6:y:2024:i:2:p:122-139:id:36309
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    References listed on IDEAS

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    1. Ashraf, Dawood & Rizwan, Muhammad Suhail & L’Huillier, Barbara, 2016. "A net stable funding ratio for Islamic banks and its impact on financial stability: An international investigation," Journal of Financial Stability, Elsevier, vol. 25(C), pages 47-57.
    2. Hassan, Kamrul & Hoque, Ariful & Gasbarro, Dominic & Wong, Wing-Keung, 2023. "Are Islamic stocks immune from financial crises? Evidence from contagion tests," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 919-948.
    3. Vo, Xuan Vinh & Ellis, Craig, 2018. "International financial integration: Stock return linkages and volatility transmission between Vietnam and advanced countries," Emerging Markets Review, Elsevier, vol. 36(C), pages 19-27.
    4. Ashraf, Dawood & Felixson, Karl & Khawaja, Mohsin & Hussain, Syed Mujahid, 2017. "Do constraints on financial and operating leverage affect the performance of Islamic equity portfolios?," Pacific-Basin Finance Journal, Elsevier, vol. 42(C), pages 171-182.
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