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

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Foo Siong Min
Nazrul Hisyam Ab Razak
Fakarudin Kamarudin
Nadisah Zakaria


Manuscript type: Research paper
Research aims: This study aims to investigate the volatility characteristics
and risk-return trade-off of Islamic and conventional indexes in the
Malaysian market.
Design/Methodology/Approach: The research covers the daily data
of the period from August 2007 to December 2022, divided into four
distinct periods: the full sample, the period during and after the 2007-
08 financial crisis, and the period during the COVID-19 pandemic. The
research employs a hybrid model that combines ARIMA with GARCH
family models.
Research findings: In this research, both Islamic and conventional indexes
in the Malaysian market demonstrate a memory effect, emphasising
the persistence of market volatility through the influence of past
volatility. Additionally, historical data, represented by lagged values,
significantly shape volatility, while negative shocks have an immediate and pronounced impact compared to positive shocks, providing valuable
insights for investors and risk management. Lastly, during the COVID-19
crisis, the conventional index showed no leverage effect, and the Islamic
index lacked safe haven characteristics, making this crisis unique in the
Malaysian financial context.
Theoretical contribution/Originality: This research contributes to the
understanding of market volatility dynamics in the Malaysian context by
utilising a hybrid ARIMA-GARCH model. The identification of memory
effects, asymmetric responses, and the unique characteristics observed
during the COVID-19 crisis adds to the body of knowledge on financial
market behaviour.
Practitioner/Policy implication: The findings of this study have practical
implications for investors and supervisory entities operating in the
Malaysian market. Understanding the persistence of volatility and the
differential impact of positive and negative shocks can help investors
make more informed decisions, while regulators can use this information
to quantify and manage market volatility effectively.
Research limitation/Implications: The limitation of the present study is
that the results may be influenced by the selection of the sample period,
potentially yielding different outcomes depending on market conditions,
such as the presence of bull or bear markets, periods of high or low
volatility, or other contextual factors.


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