Resilience of Islamic and conventional equity markets in turbulent times

Abstract

Purpose: The purpose of this study is to examine the resilience of Islamic equities during crisis periods and in times of financial distress and how the industry composition and other characteristics of Islamic financial markets contribute to this resilience.

Design/methodology/approach: This study uses panel regressions, pooled regressions and EGARCH models to analyse the impact of various crisis periods and financial distress on the returns and the volatility of Islamic and conventional equities. The main sample covers 48 Islamic and conventional equity indices from 1996 to 2023.

Findings: Islamic equity indices are more stable than conventional equity indices during various financial crises and the COVID-19 pandemic. These findings also hold for continuous measures of financial distress and a global crisis index. Industry composition contributes substantially to the relative resilience of Islamic equities. Many performance differences reduce or disappear once controlling for industry. There are additional protective factors of Islamic equities including lower leverage and the exclusion of volatile assets.

Practical implications: The findings provide valuable insights for index construction, risk management and diversification strategies in times of financial instability. Diversification across Shari’ah-compliant firms and industries is beneficial.

Originality/value: This study provides a comprehensive analysis of resilience among Islamic equities in turbulent times, covering multiple binary and continuous measures of financial crises and financial distress. Importantly, it considers the role of industry composition and other factors in contributing to their resilience. These results have implications for index construction and for risk management and diversification strategies in turbulent times.