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

Abstract

PurposeThe 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/approachThe 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.FindingsThe 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 implicationsOur 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/valueTo 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.

Risk Spillover of Russia-Ukraine War and Oil Price on Asian Islamic Stocks and Cryptocurrency: A Quantile Connectedness Approach

“…Moreover, in the mid quantile, WAR is a major risk transmitter of shocks (23.46%), whereas major receiver in the lower quantile (-21.87%). The heterogeneous appearance of WAR as a net risk receiver and/or transmitter denotes that over lower/extreme events, WAR receives shocks, and during higher extreme events, WAR transmits shocks (Boungou & Yatié, 2022;Meo et al, 2021;Mohamad, 2022;Umar et al, 2022). Furthermore, results uncover that BTC plays the role of a major net risk receiver in the mid-quantile (-21.87%).…”

“…Islamic finance deals with interest-free mechanisms, where no gambling or speculation is allowed (Chowdhury et al, 2020). Regarding the resilience of Islamic finance, several studies conclude that Islamic finance is more resilient than conventional finance especially during the last few crises, including the COVID-19 pandemic (Meo et al, 2021;Uddin et al, 2017). Like other financial markets, the Islamic finance industry is not exempted from getting hit by the impact of the Russia-Ukraine war (Będowska-Sójka et al, 2022).…”

Resilience of Islamic Equities against Uncertainty

“…In Islam, uncertainty can be classified into two types: uncertainty related to hereafter matters that affect one's relationship with God and uncertainty that relates to worldly issues such as economic and financial risk (Mustafa et al, 2016). Uncertainty can be experienced in economic and financial aspects that hamper the macroeconomic indicators of any economy (Saeed Meo et al, 2021). Uncertainty is a broad concept including uncertainty over the path of macro phenomena like GDP growth, micro phenomena like the growth rate of firms, and non-economic events like war and climate change (Bloom, 2014).…”

“…Generally, financial markets are vulnerable to uncertainty, including pandemics, terrorist attacks, and others (Salisu & Shaik, 2022;Tahir et al, 2020). Furthermore, Word Uncertainty strongly impacts regional Islamic stock indices (Saeed Meo et al, 2021). Islamic index is affected by a crisis and is open to financial contagion in the long run (Abduh, 2020;Abdullahi, 2021).…”

Does pandemic uncertainty spur public health expenditures? Evidence from European Union economies

“…The COVID-19 outbreak has resulted in substantial extra expenditures for governments. During pandemic uncertainty (PUN), a drop in economic activity might have a considerable influence on national income collection, particularly tax revenues (Saeed Meo et al, 2021;Okpua et al, 2022). PHE is projected to rise during the pandemic time period in order to manage and treat healthcare consumers and restrict the transmission of the virus (Lupu & Tiganasu, 2022).…”