Volatility transmission within financial markets during the COVID-19 pandemic: are faith-based investors well off in Tunisia?

Abstract

Purpose This paper aims to investigate the risk-return and volatility spillover within the Tunisian stock market during the COVID-19 pandemic analyzing both the Islamic and conventional stocks’ performance. Design/methodology/approach Both symmetric (GARCH and GARCH-M) and asymmetric (Threshold GARCH and Exponential GARCH) models are used to analyze the market returns and volatility response. Standard and Poor’s (S&P) index has been used to test both the Islamic and conventional stocks within the Tunisian stock market. Findings The findings suggest that both Tunisia Islamic and conventional stock markets are highly persistent; however, the conventional stock index showed a negative return spillover on the Islamic stocks during the pandemic. The conventional stock index has also shown a higher exposure to risk for a lower amount of return, and evidence of potential diversification benefit between both indexes was found during the pandemic, whereas the Islamic market showed a positive leverage effect, indicating a positive correlation between past return and future return; the conventional index implied a negative leverage effect. Originality/value The value of this paper emerges in studying three main aspects that are specific to the Tunisian stock market. This includes COVID-19 effect of return spillovers, volatility transmission across both conventional and Islamic stock market within the local financial market.

The Volatility and Risk-Return Trade-Off of Malaysian Islamic and Conventional Indexes During the Global Financial Crisis and COVID-19 Pandemic

“…The same phenomenon is being observed as well for the Islamic and conventional indexes in the full sample period. Hence, the results of this study contradict the findings of Akinlaso et al (2021) and Yong et al (2021), who found little potential for abnormal returns in equity markets. However, such speculation causes the Islamic equity index to be less efficient, to fall in the long term, and eventually harm economic development.…”

“…The results demonstrate that the Islamic index is less volatile than its counterpart during the GFC due to a higher weightage of defensive stocks and a lack of conventional financial institution stocks. In Tunisia, Akinlaso et al (2021) found a negative but significant risk-return trade-off relationship in the conventional index. Nevertheless, they could not find a similar relationship in the Islamic index using symmetric and asymmetric GARCH models.…”

“…Extant studies in the strand of literature employed the Generalized Auto-Regressive Conditionally Heteroscedastic (GARCH) and its family models to construct a volatility framework in finance and economics. The GARCH and family models proved their effectiveness in capturing volatility clustering, persistence, and asymmetric effects (see Abduh, 2020;Hossain et al 2021;Yong et al 2021;Akinlaso et al, 2021;Danila et al, 2021;Arashi & Rounghi, 2022;and Kaur & Singla, 2022). Abduh (2020) compared the volatility of Islamic and conventional equity indexes using the GARCH (1,1) model in Malaysia between 2008 to 2014.…”

Volatility spillovers across sectors and their magnitude: A sector-based analysis for Australia

“…Bissoondoyal-Bheenick et al [ 9 ] confirm that stock return and volatility spillover have significantly increased with the rapid outbreak of the Covid-19 pandemic. These findings align with Aslam et al [ 7 ] and Akinlaso et al [ 14 ]. During the pandemic, the total directional volatility spillovers among twelve European stock markets remain high [ 7 ].…”

“…During the pandemic, the total directional volatility spillovers among twelve European stock markets remain high [ 7 ]. In Tunisia, the Covid-19 outbreak has caused the conventional stock market to transmit negative volatility spillovers on the Islamic stock markets [ 14 ].…”