Investor Sentiments, the COVID-19 Pandemic and Islamic Stock Return Volatility in Indonesia

Purpose — This study aims to investigate the effect of investor sentiments, as measured by the Consumer Confidence Index (CCI), and the impact of COVID-19 on Islamic stock return volatility proxied by the Indonesia Sharia Stock Index (ISSI). Design/Methodology/Approach — This study employs the GARCH (1,1) model to test the impact of investor sentiments and COVID-19 on the volatility of Islamic stock returns using monthly data from July 2011 to December 2021. Findings — The findings of this study indicate that investor sentiments negatively impact the volatility of Islamic stock returns; while COVID-19 caused a high and persistent effect on Islamic stock return volatility. Originality/Value — Research on investor behaviour and volatility in the Islamic capital market (ICM) is limited. Investor sentiment is an essential variable in predicting the volatility level of stock returns. Investors must be aware of major events that are happening globally, such as COVID-19. This research specifically focuses on the sentiments of Islamic stock investors in Indonesia. Research Limitations/Implications — This study uses a traditional GARCH model for variance and is limited to the Islamic stock market in Indonesia. Only a few variables were assessed, notably investor sentiments and COVID-19 on the impact of stock return volatility, using monthly data. Practical Implications — Research on market volatility will significantly help investors, companies and regulators determine strategies to overcome risks. This research illustrates how investor behaviour can influence the movement of stock returns. A global event, notably the COVID-19 pandemic, proved to have significantly impacted the conditions of ICMs.