Impact of Economic Policy Uncertainty and Macroeconomic Factors on Stock Market Volatility: Evidence from Islamic Indices

Abstract

The primary purpose of the study is to investigate the volatility spillovers from global economic policy uncertainty and macroeconomic‎factors to the Islamic stock market returns. The study focuses on the Islamic stock indices of emerging economies including Indonesia,‎Malaysia, and Turkey. The Macroeconomic factors are industrial production, consumer price index, exchange rate. EGARCH model is‎employed for investigation of volatility spillovers. The results show that the global economic policy uncertainty has a significant spillover‎effect only on the returns of Turkish Islamic stock index. Similarly, the shocks in macroeconomic factors have little influence on the‎volatility of Islamic indices returns. The volatility of Indonesian and the Turkish Islamic stock indices returns is not influenced from the‎fluctuations in macroeconomic factors. However, there is significant volatility spillover only from industrial production to the returns of‎Malaysian Islamic index. The results suggest that the Islamic stock markets are less likely to influence from the global economic policies‎and macroeconomic factors. The stability of Islamic stocks provide opportunity for diversification of portfolios, particularly in stressed‎market conditions. The major price factors of Islamic markets could be firms’ specific factors or investors’ behaviors. The findings are‎helpful for policy makers and investors in formulating policies and portfolios.