Exploring the Resilience of Islamic Stock in Indonesia and Asian Markets

Abstract

This study aims to investigate the relationship between returns and risk of Islamic stock under stable economic conditions, crises, and pandemics within the scope of Indonesian and Asian Islamic capital markets. How do economic conditions affect the risks and returns of investors in the Indonesian and Asian Islamic capital markets? Verification of the veracity of the Islamic capital market serves as a more resilient option for alternative investments. This study uses Granger causality to determine exogenous and endogenous variables when building the model. The model that is formed is then analyzed using regression with dummy variables of stable economic conditions, crises, and pandemics. The first research findings on differences in crisis, stable and pandemic times in the Asian stock market show that there is no significant difference in effect between stable times and during a crisis, but there are differences in the effect during stable and pandemic times. The second research finding states that the return on Asian market Shariah stocks has no influence on increasing or reducing the value of risk or value at risk. The third finding explains that Islamic stocks in Indonesia have a greater risk value during pandemics and crises than in stable times, but the effect of pandemic and crisis conditions is not as great as Islamic stocks in Asia as a whole. In order to stabilize markets and reduce risks, regulatory bodies and governments frequently employ a variety of actions during times of crisis. When applied to trading volume, risk, and return patterns, these findings can help determine the appropriate policy.

1. Introduction

One of the key funding sources for growing businesses is the stock market (Bui 2023). Businesses that sell their stocks on the capital market can expand their sources of funding. The money acquired will be used in the long run to maximize and enhance the company’s performance (Bose et al. 2019). According to Abdulkarim et al. (2020), businesses must then work to uphold and grow investor confidence by delivering their finest work in the market, especially the Islamic stock market. The country’s economic growth is positively impacted by the stock market’s development (Aali-Bujari et al. 2017; Rakib and Hossin 2023; Sadeghi et al. 2023). Through indirect transmission mechanisms, the effects of stock market development and investment have a positive relationship that develops over time in an efficient stock market with economic growth (Coşkun et al. 2017; Hyacinth et al. 2023). Countries with low unemployment rates, comparatively small income and social inequality gaps, low crime rates, and generally stable political and security environments are preferred by investors. Therefore, the stock market will be better and more stable the more the political and economic situations of the nation stabilize.

At first, the COVID-19 pandemic had no impact on the stock market despite spreading quickly over the world. However, the market began to respond unfavorably to the sharp rise in mortality (Ashraf et al. 2023; Hsiao and Chiu 2024; Khan et al. 2023). A decrease in stock market values was also brought on by the coronavirus, particularly after the World Health Organization (WHO) declared a pandemic, which resulted in unfavorable abnormal returns in the market (AlAli 2020; Al-Qudah and Houcine 2022; Liu et al. 2020). Investors sell their stocks because of the pandemic’s effects on capital markets, trading schedule adjustments, and negative signals (bad news) (Corbet et al. 2021; Machmuddah et al. 2020). The pandemic’s effects also extend to the dynamics of the stock market, as declining stock exchanges globally result in a rise in market inefficiencies (He et al. 2020; Lalwani and Meshram 2020; Liu et al. 2020; Melina et al. 2023).

Figure 1 depicts the daily fluctuations in the stock price of the Indonesian Islamic Index (JII30) from 2018 to 2020. The JII30 index underwent a correction at the time when the initial positive case of COVID-19 was detected in Indonesia, prompting the government to initiate the implementation of large-scale social restrictions (PSBB). This parallelism can be understood as the response of the Indonesian stock market, including both conventional and Shariah sectors, to the COVID-19 outbreak. Investors started to withdraw their funds from the capital market and hold onto cash, resulting in a significant correction in both indices.

The pandemic had an impact not only on the Indonesian stock market but also on the Asian stock market. Figure 2 explains the phenomenon of the Asian stock market at the beginning of the pandemic and its response to this phenomenon. Asian Islamic stock markets have been greatly affected by the COVID-19 pandemic, leading to economic instability and diminished investor trust. Significant industries impacted include the travel, hospitality, and retail sectors, resulting in reduced profitability. The fluctuation in oil prices had a detrimental effect on the income and profitability of countries that largely depend on oil. The prevailing global economic instability has resulted in diminished investor assurance and heightened market instability, impacting both Islamic equities and conventional ones. The ability of Islamic financial institutions to support Islamic stocks has been hindered by supply chain disruptions that have impacted manufacturing and production activities. The decline in consumer sentiment has also impacted the performance of companies that serve consumer requirements. The efficacy of government interventions and economic stimulus plans has exhibited disparities among different markets and sectors, with the potential for recovery primarily contingent upon vaccination rates, economic policies, and global demand patterns.

Upon examining the market capitalization in Figure 3, it becomes evident that the average market capitalization of the Islamic stock market in Indonesia is around 25% of the market capitalization of the overall capital market. The capital market in Indonesia now holds the distinction of being the largest capital market in the ASEAN region. Given the significant market potential and the expanding Islamic stock market in Indonesia, it is worthwhile to conduct a more comprehensive investigation. In addition to that, refer to Figure 4. The annual performance of the Asian Islamic index demonstrates comparable or marginally superior performance during regular periods. During the crisis and pandemic, the Asian Islamic index exhibited a slightly superior performance compared to the Asian index.

The global economic slowdown has not been limited to the COVID-19 pandemic. Indonesia and Asian countries have experienced the effects of various global economic crises in the past 20 years, including the Asian monetary crisis in 1998, the American Subprime Mortgage Crisis in 2008, and the Turkish Lira Crisis in 2018. On 13 August 2018, the Turkish Lira depreciated to 6.88 against the United States (US) dollar (Orhangazi and Yeldan 2021; Sumer and Ozorhon 2021). The Turkish Lira Crisis was an economic crisis that arose from Turkey’s reliance on foreign debt, demands for low interest rates, the US imposition of a 100 percent rise in import taxes on Turkey, and diplomatic conflicts with the United States. Due to Turkey’s status as a G20 country, its economic operations are closely linked with other countries, leading to disruptions in the global economy. This has had an impact on Indonesia, as seen by a 10.83 percent fall in the IHSG (Arbaa and Varon 2019; Sumer and Ozorhon 2021) and Asia (Kalash 2023; Stoupos et al. 2023).

According to Grout and Zalewska (2016), Islamic stocks are resilient to financial turmoil. Islamic stocks outperformed regular equities during the global financial crisis of 2008–2009, seeing a lesser influence on their performance support by Jawadi et al. (2014) and Luchtenberg and Vu (2015). Meanwhile, the research conducted by Akguc and Al Rahahleh (2021) demonstrated that Islamic stocks have the potential to outperform conventional stocks in terms of earnings adjusted for risk, particularly during periods of financial crisis. In addition, Arif et al. (2022) and Al-Khazali et al. (2014) analyze global Islamic stock indexes and compare their findings with those of conventional market indices. Their findings suggest that the performance of Islamic stock markets surpasses that of other similar conventional stock indexes. Furthermore, Robiyanto (2018) found that after the Subprime Mortgage Crisis in 2008, the Indonesian stock market was more integrated with several stock markets in Asia especially in the stock markets in the ASEAN region. Aligning with that, Rizvi and Arshad (2016) presented study findings that suggest a generally negative and worsening impact of the Asian financial crisis, while the sub-prime crisis impact varies based on the economic structure of the economies (Nasarudin and Nugraha 2021).

Naturally, the market, especially the Indonesian stock market, reacted to the notable economic downturn. This study addresses a research gap by conducting research using three different periods: stable, crisis, and pandemic. The study focuses on specific Indonesian Islamic index and Asian Islamic index, which have not been previously explored in any research. This study aims to explore the resiliency of Islamic stock in Indonesia and Asian stock markets, especially the relationship between the Indonesian Islamic stock market and the Asian Islamic stock market, throughout three distinct periods: the economic crisis, a stable economic environment, and the current pandemic.

2. Literature Review

Islamic equities have to fulfill certain requirements in order to guarantee compliance with the principles of Shariah and are distinct from traditional stocks. There are typically two stages involved in Shariah assessment. While the second stage examines ratios related to finance, the primary level examines the essence of the firm (Aziz et al. 2021). Investors who seek diversity may find that investing in Islamic equities is a suitable option. They usually carry less debt than other types of investments, which lowers risk. Furthermore, these stocks provide stability because they are supported by assets (Asutay et al. 2022).

Financial distress cannot weaken Islamic stocks. Compared with traditional equities, Islamic stocks performed well during the global financial crisis of 2008–2009, and it had less of an impact on them (Grout and Zalewska 2016; Jawadi et al. 2014; Luchtenberg and Vu 2015). Studies by Akguc and Al Rahahleh (2021) revealed that Islamic stocks could exceed regular stocks in terms of risk-adjusted earnings, especially in times of financial crisis. Additionally, Al-Khazali et al. (2014) examined worldwide Islamic stock indexes and contrasted their results with those of traditional market indices. Their results indicate that Islamic stock market performance is greater than those of other comparable traditional stock indexes.

Further, Al Rahahleh et al. (2021) employed industry-sector indexes derived from 1996 to 2011 together with weekly data from the Dow Jones Islamic Market Index (DJIM) and the Financial Times Stock Exchange (FTSE). In contrast to their primary conventional equivalents, the author discovered that the industry’s portfolio of Islamic equities had a reduced risk exposure. Karim et al. (2010) focused on how the worldwide economic downturn affected Islamic financial market co-movements and incorporation. The integration methods are employed throughout two periods (pre-crisis and during the crisis) (Arif et al. 2022). The findings indicated that there was no integration between the Islamic equity markets over the two periods. Thus, the long-term co-movements between the Islamic financial markets are unaffected by the financial collapse. Nevertheless, Umar et al. (2018) demonstrated that the Islamic stock market has a substantial adverse response to interest rate risk using data for the years 1996–2015. They discover that Islamic stocks perform similarly to standard stocks in terms of interest rate sensitivity. Uddin et al. (2018) also argued that Islamic equities outperform traditional stock markets only in the short to medium run when compared to non-Muslim nations such as the UK and Japan.

According to Aziz et al. (2021) the advantages of Islamic equities extend beyond Islamic nations; they are equally helpful in non-Muslim nations as well. Considering this, when comparing the outcomes of Islamic and conventional equities in Muslim and non-Muslim nations throughout the financial meltdown of 2008, Hassan et al. (2023) discovered that Islamic stocks performed well in both Muslim and non-Muslim communities. According to Sundarasen et al. (2023), one of the many conclusions drawn from this research is that, during a pandemic, markets in the ASEAN area seem to be more unpredictable than those in the GCC. Secondly, compared to their non-Shariah equivalents, the majority of Shariah indices showed higher levels of volatility during the COVID-19 epidemic.

According to Sahabuddin et al. (2023), while conventional and Islamic stock indices in Malaysia had somewhat reduced volatility during the global financial crisis, those in China exhibited increased volatility. They found that investors can profit from diversification in the Islamic stock exchanges across economic categories, including developed and emerging economies. Applying a multivariate integration examination, Girard and Hassan (2008) found no significant distinctions between both types of indexes, indicating that their risk and diversification advantages are equal. Their research covered the pre-recession time (1999–2006). According to Ali et al. (2023), COVID-19 has a negative correlation with the returns of both indices up until the start of August. It appeared that volatility for the conventional index rose over that time, whereas for the Islamic index, it fell. Following the World Health Organization’s (WHO) declaration of COVID-19 as a global pandemic, AlAli (2020) used event study research to look at how the five biggest Asian stock markets dealt with the news. Stock market returns on key Asian stock markets were significantly impacted negatively by the WHO news, according to the results of this research.

Further study examines the presence of clustering tendency concerning ethical decisions in accordance with Shariah. Through an analysis of the Dow Jones Islamic index’s component equities, Stavroyiannis and Babalos (2017) found that stockholders demonstrated a strong antiherding tendency, particularly during volatile times. The results reveal robust contagion effects of the financial crisis on Islamic stock indexes. Furthermore, we find Baker and Wurgler’s investor sentiment can predict Islamic stock returns during the crisis period (Hassan et al. 2023; Sahabuddin et al. 2023). Hassan et al.’s (2023) findings indicate that Islamic stocks cannot be used as a haven asset during financial turmoil. Another study conducted by Lobão (2024) explores price clustering in Islamic equities that are listed on exchanges in three countries (Pakistan, Malaysia, and Indonesia). According to his research, there may be some price grouping, with investors favoring prices that finish in zeros and fives. Evidence, however, fails to endorse cultural justifications for clusters. Furthermore, the author finds favorable relationships among comparative bid–ask growth, the price of the stock, and clustering price. While some investigation indicates that investing in Islamic funds may have advantages, other studies present an opposing view.

From the above arguments, the majority of the previous literature shows that Islamic stock markets do not always behave as the conventional equity market does. As observed by the global recession or crisis, they may thrive in times of economic difficulty. However, the nation and the particular time frame determine how linked they are to conventional financial markets. The stock exchange, especially Islamic choices, is influenced by the country’s financial infrastructure as a whole. Overall, the majority of research comparing the Islamic and conventional equity markets has indicated certain commonalities between both. However, based on our current understanding, no research has been conducted to investigate the relationship between Islamic stock returns and Islamic stock risk under stable economic conditions, crises, and pandemics within the scope of Asian Islamic capital markets and answer the question of how resilient Islamic stocks in Asian markets are. Hence, this gap is filled by the present work.

3. Materials and Methods

In this study, daily data used were sourced from the Asian Market Islamic Index (ISDE.L) and the Indonesian Islamic Index (JKII). The daily data covered the period from January 2018 to Jan 2022. Data on the stock market index were obtained from the Yahoo finance database (stock market index and trading volume, https://finance.yahoo.com/quote/%5EJKII/ (accessed on 6 March 2024)) and the Thomson Reuters Eikon database (VaR, https://eikon.refinitiv.com/ (accessed on 20 December 2023)).

Tseng et al. (2024) examined the stationarity of time series data by analyzing the slope of the objective function, which relies on variance stationarity. Examining time series data allows us to analyze patterns of variance over time, revealing fluctuations and disparities during stable periods, crises, and pandemics. In addition, the Granger causality test is an econometric test that is utilized to assess the predictive value of one variable on another. This study employs a bivariate system in the Granger causality test to analyze the relationship between two time series. The relationship is then modeled using a vector autoregressive models system approach aligned with lag optimal VAR result in (Hecq et al. 2023, Table 2), as shown in the following equation:

$$x_t=c_1+{\sum }_{i=1}^3{\alpha }_{1,i}{y}_{t-i}+{\sum }_{i=1}^3{\beta }_{1,i}{x}_{t-i}+{ϵ}_{x,t}$$

(1)

$$y_t=c_2+{\sum }_{i=1}^3{\alpha }_{2,i}{y}_{t-i}+{\sum }_{i=1}^3{\beta }_{2,i}{x}_{t-i}+{ϵ}_{y,t}$$

(2)

In order to assess the causal relationship, this study must establish the statistical significance of any lagged variables in our model. This can be carried out by conducting a Wald test for linear restrictions. During the testing for Granger causality, this study examines the null hypothesis of non-causality and rejects it when the test statistic follows a larger distribution. Additionally, it tests for causality in both directions, from x to y and from y to x.

Once the Granger causality test has been conducted, it becomes necessary to ensure the robustness of the test model in order to distinguish the impact of crisis, stable, and pandemic periods. The test model that will be conducted involves a multiple linear regression of dummy variables with categorical periods of crisis, stability, and pandemic.

Model 1

$${Return}_{t,asia}=\alpha +{\beta }_1{Return}_{t-1,asia}+B_2{VaR}_{t,asia}+{\beta }_3{D}_{1(s-c),t}+{\beta }_4{D}_{2(s-p),t}+{\beta }_5{vol}_{t,asia}+{\epsilon }_t$$

(3)

Model 2

$${VaR}_{t,asia}=\alpha +{\beta }_1{Return}_{t,asia}+{\beta }_2{D}_{1(s-c),t}+{\beta }_3{D}_{2(s-p),t}+{\beta }_4{vol}_{t,asia}+{\epsilon }_t$$

(4)

Model 3

$${Return}_{t,indo}=\alpha +{\beta }_1{Return}_{t-1,indo}+B_2{VaR}_{t,indo}+{\beta }_3{D}_{1(s-c),t}+{\beta }_4{D}_{2(s-p),t}+{\beta }_5{vol}_{t,indo}+{\epsilon }_t$$

(5)

Model 4

$${VaR}_{t,indo}=\alpha +{\beta }_1{Return}_{t,indo}+{\beta }_2{D}_{1(s-c),t}+{\beta }_3{D}_{2(s-p),t}+{\beta }_4{vol}_{t,indo}+{\epsilon }_t$$

(6)

Variable description.

• Return_t,asia = Asian market Islamic stock index return;
• Return_t−1,asia = Asian market Islamic stock index return 1 previous period;
• Return_t,indo = Indonesian Islamic stock index return;
• Return_t−1,indo = Indonesian Islamic stock index return 1 previous period;
• VaR_t,indo = Value at risk Indonesia;
• VaR_t,asia = Value at risk Asia;
• D1_(s-c),t = Dummy condition variable(Stable (0)-Crisis (1));
• D2_(s-p),t = Dummy condition variable(Stable (0)-pandemic (1));
• Vol_t,asia = Ln Asian Islamic stock trading volume;
• Vol_t,indo = Ln Indonesian Islamic stock trading volume.

Daily stock returns are calculated based on the formula (Pt − Pt − 1)/(Pt − 1), where Pt is the stock price for the t period, while Pt − 1 is the stock price the day before. Meanwhile, the historical value at risk is calculated based on the formula Vm (Vi/Vi − 1), where Vi shows the number of variables on day i, and m is the number of days for which historical data were taken. This research uses 20 days of historical stock returns with a confidence level of 95%. In addition, a dummy variable is created using three categories: stable, crisis, and pandemic. The basic coding assigns the value of “stable” as the reference category, resulting in the formation of two dummy variables.

4. Results and Discussion

Table 1. Stationarity test. Unit-root with Augmented Dickey–Fuller (ADF) test.

Augmented Dickey–Fuller Test Statistic	Whole Data	Crisis	Stable	Pandemic
Return Indo	−15.3891 (0.0000)	−11.5371 (0.0000)	−14.2371 (0.0000)	−11.4123 (0.0000)
Return Asia	−16.1856 (0.0000)	−14.8942 (0.0000)	−12.88114 (0.0000)	−13.82542 (0.0000)
VaR Indo	−14.4728 (0.0000)	−14.4721 (0.0000)	−7.8805 (0.0000)	−14.5969 (0.0000)
Var Asia	−13.2935 (0.0000)	−15.7476 (0.0000)	−6.6518 (0.0000)	−10.8921 (0.0000)

Source: data processing.

provides stationarity data. Meanwhile, Figure 5 and Figure 6 explain a detailed analysis gradient of the objective function Asian Islamic stock index. It illustrates the volatility of the research variable based on the gradient of value at risk. The figure highlights that the risk and the return Islamic index in Asia exhibited abnormal or anomalous volatility at the beginning. The pandemic has highlighted how the market and investors react to changes brought about by such a crisis. It takes time for the market and investors to adjust to the new situation, resulting in volatile risks and high trading volumes with sharp price declines initially. The impact of the pandemic on the Asian Islamic stock index is evident in the response observed, affecting not only stock returns but also trading volume, which tends to adopt a cautious approach during these uncertain times. It can be seen that investors have a negative outlook on the pandemic and doubt that the situation will improve rapidly. However, Figure 5 illustrates that volatility is short-lived and stock returns quickly stabilize or revert back to their initial state. In addition, the dummy variable highlights the disparity in risk between the stable line during the 2018 crisis and the stable line during the 2020 pandemic. This demonstrates the distinction outside of the abnormal period or the onset of the pandemic event. There are noticeable distinctions between stable and crisis periods, particularly when it comes to volatility. During stable times, the volatility is lower compared to the volatility experienced during a crisis, such as the current pandemic affecting Asian stock indices.

Meanwhile, Figure 6 illustrates the VaR gradient of the objective function of the Indonesian Shariah stock index. This chart illustrates the fluctuation of the research variable in relation to the value at risk gradient. It is evident that the risk volatility of Shariah stocks and the Shariah index in Indonesia exhibited abnormal or anomalous behavior at the beginning of its occurrence. The pandemic has highlighted how the market and investors react to changes brought about by the pandemic. It takes time for the market and investors to adjust to the new situation, resulting in volatile risks and trading volumes. At the beginning of the pandemic, we witnessed high volatility and significant price declines. In the Indonesian Shariah stock index, it is evident that the response observed was not limited to stock returns alone. Trading volume also displayed a cautious approach during the pandemic. It seems that investors are feeling quite pessimistic about the pandemic and are not confident in a quick recovery. However, history has shown that volatility is often short-lived and stock returns tend to stabilize or bounce back in no time. In addition, the dummy variable highlights the disparity in risk between the stable line during the 2018 crisis and the stable line during the 2020 pandemic. This demonstrates the distinction from the abnormal period or the onset of the pandemic event. There are noticeable variations between stable and crisis periods, particularly when it comes to the higher volatility experienced during times of crisis, such as the current pandemic’s impact on the Indonesian stock index. When a pandemic or anomaly occurs, the Indonesian and Asian Shariah stock indices show similar investor and market responses. However, the volatility of the Indonesian Shariah stock index appears to be higher than that of the Asian Islamic stock index before and after these events.

In addition, the Indonesian Shariah stock index exhibits greater volatility during times of crisis compared to the Asian Shariah stock index. This suggests that Shariah stock investors in Asia prefer long-term returns and lower risks, even in the face of external conditions. Typically, in Asia, the market or investor response tends to involve careful consideration of the situation before reaching a decision.

Granger causality testing focuses on conducting statistical hypothesis testing to examine how the independent variable affects the dependent variable, or vice versa, within different or the same time series. Adding lag or delay is an essential step in performing the Granger test, as it involves several stages. Typically, one would choose the number of lags based on an information criterion like the Akaike information criterion (AIC) or the Schwarz information criterion. In the regression, a specific lagged value of one variable is kept if it meets two conditions: firstly, it must be statistically significant based on a t-test, and secondly, the inclusion of other lagged values of the variables must improve the explanatory power of the model according to an F-test. If no lagging values of the explanatory variables have been retained in the regression, then the null hypothesis of Granger causality is not rejected.

The results of the unit root test in Table 1, using the Augmented Dickey–Fuller test, indicate that the null hypothesis of having a unit root or non-stationarity for Return Indonesia, Return Asia, VaR Indonesia, and VaR Asia is rejected. The probability values obtained from Table 1 are less than 5%, which leads to the rejection of the null hypothesis that all variables are stationary.

Table 2. VAR lag order selection criteria.

Lag	LogL	LR	FPE	AIC	SC	HQ
0	13,626.90	NA	0.000	−25.801 *	−25.782	−25.794
1	16,298.67	5318.239	0.000	−30.831	−30.737 *	−30.795 *
2	16,329.32	60.767	0.000	−30.858	−30.689	−30.794
3	16,358.55	57.756 *	0.000 *	−30.884	−30.639	−30.791

* Indicates lag order selected by the criterion; LR: sequential modified LR test statistic (each test at 5% level); FPE: Final prediction error; AIC: Akaike information criterion; SC: Schwarz information criterion; HQ: Hannan–Quinn information criterion.

presents the outcomes of the VAR (vector autoregressive) lag order selection criteria. Lag 1 is determined to be the most suitable based on the Schwarz criterion (SC) and Hannan–Quinn criterion (HQ), whereas lag 0 represents the lag order chosen according to the Akaike information criterion (AIC). While lag 3 was chosen using LR and FPE, this study decided for lag 1 based on the selected parameters of SC and HQ.

After completing the necessary steps and choosing the optimal lag model, a Granger causality return and risk (VaR) test was conducted on the data of the Asian Sharia stock index and Indonesian Sharia stock index, as displayed in

Table 3. Granger causality return of VaR Asian and Indonesian Islamic index.

Null Hypothesis:	Obs	F-Statistic	Prob.
return_indo does not Granger cause return_asia	1057	0.763	0.466
return_asia does not Granger cause return_indo		0.513	0.598
var_asia does not Granger cause return_asia	1057	2.562	0.077 *
return_asia does not Granger cause var_asia		13.685	0.000 ***
var_indo does not Granger cause return_asia	1057	5.641	0.003 ***
return_asia does not Granger cause var_indo		1.879	0.153
var_asia does not Granger cause return_indo	1057	17.1904	0.000 ***
return_indo does not Granger cause var_asia		1.2129	0.297
var_indo does not Granger cause return_indo	1057	1.7633	0.172
return_indo does not Granger cause var_indo		12.8628	0.000 ***
var_indo does not Granger cause var_asia	1057	0.2388	0.787
var_asia does not Granger cause var_indo		14.1424	0.000

Source: data processing, confidence level (“*” α = 10%; “**” α = 5%;“***” α = 1%).

.

Granger causality results show that the return on the Indonesian Islamic stock index cannot cause or predict the return on the Asian Islamic stock index, and vice versa, the return on the Asian Islamic stock index cannot cause or predict the return on the Indonesian Islamic stock index.

Whereas the VaR or risk of the Indonesian Islamic stock index does not significantly result in or predict the VaR or risk of the Asian Islamic stock index, and vice versa, the risk of the Asian Islamic stock index cannot cause or predict the risk of the Indonesian Islamic stock index. from the results of the first Granger causality, it can be stated that the returns on Indonesian and Asian Islamic stock indices are not directly related to each other, and the risks of Indonesian and Asian Islamic stock indices are also not directly related to each other.

The interesting thing from the Granger causality findings is that the risk of the Asian Islamic stock index significantly affects the return of the Asian Islamic stock index and vice versa—the return of the Islamic stock index significantly affects the risk of the Indonesian Islamic stock index. The findings of the research results on the Asian Islamic stock index are different from the Indonesian Islamic stock index, where the return of the Indonesian Islamic stock index affects the risk of the Indonesian Islamic stock index, but the risk of the Indonesian Islamic stock index does not affect the return of the Indonesian Islamic stock index. The last finding is that there is a relationship between the risk in the Asian Islamic stock index and the return on the Indonesian Islamic stock index, where the risk of the Asian Islamic stock index has a significant influence or can predict the return of the Indonesian Islamic stock index. The risk of the Indonesian Islamic stock index has a significant influence on the return of the Asian Islamic stock index. This finding aligns with Aziz et al. (2021), whose research indicates that Islamic markets can withstand uncertainty and even thrive in times of crisis. For optimal portfolio selections, investors should pay attention to the results (Grout and Zalewska 2016; Ismail and Zulkhibri 2024).

Data regression testing was performed after the Granger causality test to examine the impact of crisis, stable, and pandemic periods.

Table 4. Research results of model data regression.

Variables	Model 1 (Return_Asia)	Model 2 (VaR_Asia)	Model 3 (Return_Indo)	Model 4 (VaR_Indo)
Var_Asia(ISDE.L)	−0.022 (0.062)
Return_Asia(ISDE.L)		−0.003 (0.0153)
Return_Asia_lag1(ISDE.L)	−0.122 *** (0.031)
ln_volume_Asia(ISDE.L)	0.001 * (0.002)	0.000 (0.0001)
VaR_Indo(JKII)			0.140 ** (0.061)
Return_Indo(JKII)				0.035 * (0.015)
Return_Indo_lag1(JKII)			−0.027 (0.031)
ln_volume_Indo(JKII)			0.003 (0.009)	0.003 (0.005)
D1_Stable-Crisis	−0.001 (0.001)	0.001 * (0.0006)	0.001 (0.001)	0.002 *** (0.001)
D2_Stable-Pandemic	0.002 * (0.001)	0.002 *** (0.0005)	0.002 (0.001)	0.003 *** (0.001)
c	0.003 (0.002)	0.010 *** (0.0008)	−0.003	0.009 *** (0.001)
R-squared	0.021	0.0117	0.009	0.035
Adjusted R-squared	0.017	0.0079	0.004	0.031
F-statistic	4.582	3.191	1.929	9.529
Prob(F-statistic)	0.000	0.015	0.087	0.000
Obs	1057	1057	1057	1057

Source: data processing, confidence level (“*” α = 10%; “**” α = 5%; “***” α = 1%); parentheses indicate standard error.

shows that Model 1’s research found that the return (t) of the Islamic stock index is negatively affected by the return (t-1) of the Asian Islamic stock index. Based on these findings, it is clear that Islamic stock performances are highly unpredictable when it comes to making forecasts about stock returns. Data linearity makes it impossible to observe Asian Islamic return. Value at risk is irrelevant to the performance of Asian Islamic stocks. This study’s findings corroborate those of Billah et al. (2024), highlighting the significance of transient disturbances in the transmission of downside risks and demonstrating that short-term dynamics are the primary drivers of tail risk connectivity and spillover. When COVID-19 and crises are in full swing, the interconnectedness of the tail risks is typically at its highest. Network analysis reveals that Islamic bonds and the growing Islamic equities markets were more interconnected with other markets during the COVID-19 and crisis periods, even if the entire sample demonstrates that the hedging capability of these markets mostly isolates their tail risks.

Additional discoveries in Table 4 present the disparities between crisis, stable, and pandemic periods. Research on the Asian stock market reveals that there is no noteworthy distinction in influence between stable and crisis times. However, there are disparities in influence between stable and pandemic times. These findings elucidate that the impact of the COVID-19 pandemic is greater than the impact of the previous crisis, and it has a highly significant effect on Islamic stock returns in Asia.

The findings of the research conducted in Model 2, as presented in Table 4, demonstrate that the trading volume and returns on Asian Islamic stock do not impact the value at risk. However, it is observed that during crisis and pandemic periods, there is an influence on the value at risk. This suggests that there are variations between the stable, crisis, and pandemic research periods. During a crisis and pandemic, investors may think that the danger and volatility of stock trading are higher compared to stable periods, leading to a greater value at risk. Furthermore, this test reveals that the risk value, or value at risk, is higher during the pandemic compared to the risk value during the crisis. Risk during times of crisis and pandemic affects not just the Indonesian stock market but also the Asian stock market (AlAli 2020; Aziz et al. 2021; Lobão 2024). Amidst times of crisis and epidemic, when there is a high level of risk volatility, this research concludes that the returns on Asian market Islamic stocks do not have any impact on growing or decreasing the risk value or value at risk. According to a study conducted by Ismail and Zulkhibri (2024), VaR (value at risk) is an imperfect estimation method for determining the amount of capital needed to cover potential investment losses in the future. Moreover, the impact of the pandemic and crisis on Asia’s value at risk is more severe in comparison to Indonesia. In their study, Gençay and Selçuk (2004) examined nine developing market nations and found that the daily return distributions displayed distinct moment characteristics in both the right and left tails. Therefore, the probability of encountering risk and potential gain varies across various economies. This is a suggestion for investors to select various capital markets based on their risk tolerance. During a crisis and pandemic time, particularly when faced with a pandemic that has significant consequences, the government has the ability to implement policy changes. Yamai and Yoshiba (2005) established that value at risk (VaR) has become a widely accepted risk metric for managing financial risks. VaR can give rise to significant issues in specific scenarios, wherein long-term projected deficit can be a more suitable alternative.

Table 4’s third model illustrates the connection between the risk–return relationship of the Indonesian Islamic stocks and the independent variable, the value at risk of these stocks. The findings show that the return of Islamic stocks is significantly impacted solely by value at risk. This study suggests that Islamic stocks in Indonesia are very resilient, particularly in the face of crises and pandemics. Meanwhile, the results of the fourth model in this study examine the relationship between the independent variable (the return of Indonesian Islamic stock) and the dependent variable (the value at risk of Indonesian Islamic stock) using dummy variables (economic conditions and trading volume of Indonesian Islamic stock). The results indicate that returns of Indonesian Islamic stocks do affect value at risk or risk. While crisis and pandemic conditions do impact the risk value or value at risk of Islamic stocks, trading volume has no bearing on this matter. This finding is supported by Karim et al. (2010) and Grout and Zalewska (2016). Despite the Subprime Mortgage Crisis, Islamic stock markets still offer a chance to diversify your portfolio internationally and reap the benefits. There is likely no cointegration in Islamic stock markets because of the strict Islamic prohibition of riba, gharar, and maysir. According to this fourth research model, Islamic stocks in Indonesia are more vulnerable to crises and pandemics than they are at other times. Nevertheless, investors can still use Islamic stock returns to estimate the risk value or value at risk of Islamic stocks in Indonesia under these conditions, since the impact of these events is not as significant as it is for Islamic stocks in Asia overall.

5. Conclusions

The Indonesian Islamic stock index shows greater volatility during times of crisis compared to the Asian Islamic stock index, highlighting contrasting responses of Asian and Indonesian investors in the face of a crisis. Granger causality testing reveals that the return on the Indonesian Islamic stock index cannot cause or predict the return on the Asian Islamic stock index, and vice versa. The risk of the Asian Islamic stock index does not significantly result in or predict the risk of the Indonesian Islamic stock index, and vice versa. The returns on Indonesian and Asian Islamic stock indices are not directly related, and the risks of both are not directly related. However, the risk of the Asian Islamic stock index significantly affects the return of the Asian Islamic stock index, and vice versa. The risk of the Asian Islamic stock index has a significant influence on the return of the Indonesian Islamic stock index, suggesting that the return of the Asian Islamic stock index is not directly related to the return of the Indonesian Islamic stock index.

The study examines the impact of crisis, stable, and pandemic periods on the return of Islamic stock indexes. The first model found that the return of the Islamic stock index is negatively affected by the return of the Asian Islamic stock index. This suggests that Islamic stock performance is highly unpredictable, making it difficult to predict its return. The second model found that trading volume and returns on Asian Islamic stocks do not impact the value at risk, but during crisis and pandemic periods, there is an influence on the value at risk. This suggests that during times of crisis and pandemic, investors may perceive the danger and volatility of stock trading as higher, leading to a greater value at risk. The third model showed that the return of Islamic stocks is significantly impacted solely by value at risk, suggesting resilience in the face of crises and pandemics. The fourth model found that returns of Indonesian Islamic stocks do affect value at risk, but trading volume has no bearing on this matter. Despite these findings, investors can still estimate the risk value or value at risk of Islamic stocks in Indonesia under these conditions.

In order to stabilize markets and reduce risks, regulatory bodies and governments frequently employ a variety of actions during times of crisis. When applied to trading volume, risk, and return patterns, these findings can help determine the appropriate policy. This research provides valuable reference material for investors seeking safer investments during times of crisis and pandemics, as well as guidance for making Islamic stock investment decisions. This research has a limitation in that it only utilizes data from stable, crisis, and pandemic periods, without incorporating all available crisis data. In addition, the research has a more specific focus on Indonesia and the Asian Islamic stock index, making it less applicable on a global scale. It would be beneficial for future research to incorporate a range of time periods and consider utilizing data from the general Islamic stock index.