Understanding the Market Volatility during COVID-19 and Global Financial Crisis through ARCH/ GARCH Modelling of Conventional and Islamic Indices

This study investigated the volatility and predictability of Islamic and conventional stock indices during two significant crises; the COVID-19 pandemic and the 2007-08 financial crisis. Using ARCH/GARCH models, the study examined the volatility behaviour of both types of indices, while ARMA/ARIMA models are employed to disclose their predictability and autoregressive characteristics. The findings revealed that Islamic indices exhibited unique resilience to financial shocks. Specifically, Islamic indices showed reduced sensitivity to initial market disruptions in both crises, suggesting greater stability compared to conventional indices. However, both Islamic and conventional indices experienced sustained volatility in prolonged crises, highlighting the need for robust risk management strategies. The study addressed a critical gap by examining how these crises affected the volatility of Islamic and conventional indices, identifying similarities and differences in their volatility patterns during periods of financial turmoil. The findings also highlight the stabilizing role of Islamic finance principles and offer important implications for investors, policymakers, and regulators in enhancing market resilience and designing effective crisis-response strategies.