The Determinant of Indonesian Stock Returns’ Volatility: Evidence from Islamic and Conventional Stock Market

Abstract

Islamic stock market is apparently different from the conventional stock market due to the prohibition of unlawful goods and excessive risk-taking behavior. This study explores the extent to which the Indonesian Islamic and conventional stock returns' volatility responds to the macroeconomic indicators. This study employs Jakarta Islamic Index (JII) and Indonesian Stock Exchange (IDX) and uses monthly time-series data covering 2001: M1 - 2019: M12. The volatility of stock returns is measured using Generalized Autoregressive Conditional Heteroskedasticity (GARCH). By employing the Autoregressive Distributed Lag Model (ARDL), the results validate the evidence of the long-run relationship between the stock market's volatility and macroeconomic variables. A rising in money supply and an economic upturn reduce the volatility of conventional stock returns but only an expansionary money supply diminishes the volatility of Islamic stock returns. Conversely, high inflation and sharp depreciation of the Rupiah boost the stock returns' volatility. The results further show an interesting finding that the Islamic stock market's volatility is more responsive to changes in macroeconomic indicators than the volatility of their counterpart conventional stock market. Policymakers should take strict rules during the worst economic conditions to minimize the negative impact of the instability of macroeconomic variables.