Impact of Covid-19 on Islamic Stock Markets: An Investigation using Threshold Volatility and Event Study Models

Abstract

The Covid-19 is an unexpected event in the world history with substantial socio-economic impact on the global economy. The global financial market was also badly affected as reflected by the extreme volatility as well as weak performances in the stock markets all over the world.  How do the Islamic stock markets in various parts of the world behave during the Covid-19 shock? The objective of this study is to identify the impact of the Covid-19 pandemic as declared by the World Health Organization on the Islamic stock markets. Using the threshold volatility and event study models, the study analyses the impact of the Covid-19 announcement on the Islamic stock indices in the Indian Stock Exchange (represented by the Bombay Stock Exchange - BSE Shariah Index) and Indonesian Stock Exchange (represented by the Jakarta Islamic Indices - JII). With the date of event identified as 11^th March 2020, the event window consists of 60, 30, and 20 days. The results show that the BSE Shariah and JII have positive coefficients, with the BSE Shariah Index shows negative response to the announcement of Covid-19 as global pandemic. On the other hand, the JII reacted positively to the event. The study shows the reaction of a stock exchange is dependent on other economic factors unique to the country, resulting in the events impact of the Covid-19 to vary from one country to another.