Volatility and Resilience in Islamic vs. Conventional Equity Markets: A Time-Frequency Analysis of Sharia-Compliant Firms

Abstract

We investigate the impact of sharia-compliancy on firm-level and market-level resilience during periods of economic stress, using the 2014-2016 oil price collapse as a case study. We evaluate financial and liquidity performance across a panel of firms representing markets with a spectrum of permeance of Islamic finance. In parallel, we implement state-space multitaper spectral analysis, GARCH volatility modeling and Markov regime switching models to examine the time-frequency behavior of stock returns and transitions across volatility regimes. Our findings suggest that Sharia-compliant firms maintain better liquidity ratios in the post-shock period and display distinctive volatility dynamics, including lower persistence in higher-volatility regimes and a faster return to baseline states. However, there exists a trade-off as they also demonstrate increased reactivity to price fluctuations as compared to their conventional counterparts.