Is the Islamic Finance Model More Resilient than the Conventional Finance Model? Evidence from Sudden Changes in the Volatility of Dow Jones Indexes

This paper addresses the question whether the Islamic indexes are more or less affected by sudden changes in volatility regimes than the “conventional” counterparts. For that purpose, we apply an iterative cumulative sum of squares (ICSS) algorithm to identify structural breaks in the volatility patterns characterizing several major Islamic and conventional indexes over a period that covers about 14 years of daily data and includes the recent large-scale financial turmoil. The results show that both Islamic and conventional indexes have been affected to the same degree by variance changes. We further test the hypothesis of equality of variance between Islamic and conventional indexes over various sub-periods defined with respect to the identified sudden changes in variance. The statistical tests confirm this hypothesis over the vast majority of sub-periods. However, when the variance is not the same across the two types of indexes, the Islamic indexes exhibit slightly higher volatilities than their “conventional” counterparts