Do Asymmetric Return’s Volatility and Changes in Macroeconomic Variables Matter? A Case of Conventional Stocks and Islamic Stocks

Abstract

This study explores the asymmetric return's volatility effects and macroeconomic variables (MV) changes for conventional and Islamic stocks. The GARCH (1,1) in mean and variance equations are acquired to predict these effects, which covered the period from January 4, 2005, to December 30, 2015. The markets, SSE (China), BSE (India), PSE (Pakistan), DJIM (Malaysia), JKII- (Indonesia), and DJWII- (Dow -Jones World Islamic Index) are considered in the study. The asymmetric effects and volatility of returns for the markets were found to be persistent. Changes in macroeconomic variables showed that the asymmetric return's volatility of SSE and BSE is influenced by the inflation and PSE by interest rate from the conventional side. However, interest rates from the Islamic side negatively affect DJIM by industrial production and DJWI. The investors of other countries can employ these strategies to interpret the asymmetric market conditions, current and past effects, business environment, the actions of the equity market's returns and macroeconomic factors. Moreover, investors, policymakers and portfolio managers can benefit from their diversification strategies.