How Do Sectoral Islamic Equity Markets React to Geopolitical Risk, Economic Policy Uncertainty, and Oil Price Shocks? Using Quantile on Quantile Regression Analysis

Our study extends the existing literature by exploring the impact of three major risk and uncertainty indices on the Dow Jones Islamic Market (DJIM) World and the ten major sectoral Islamic equity indices. We also look at whether the sectoral indices differ from the global benchmark index regarding the studied uncertainties’ impact. Using the Quantile-on-Quantile (QQ) approach for the data period from May 15, 2013, to August 23, 2021, we document that DJIM world and most Islamic equity indices are positively linked with geopolitical risk (GPR), signifying their hedging capabilities against GPR shocks. These hedging abilities are more pronounced in the consumer goods, oil & gas, and financial sectors. Furthermore, the dependency structures between extreme economic policy uncertainty (EPU) shocks and the DJIM world, consumer goods, financials, healthcare, and industrial sectors are positive only in bearish conditions. This implies that the hedging benefit is limited to the lower quantiles. In contrast, the basic materials and oil & gas sectors can hedge the EPU shocks better than the DJIM world and other sectors, depending on market states. On the other hand, oil market volatility (OVX) adversely affects all the Islamic equity indices, implying that none can provide hedging benefits against OVX shocks. Our findings have prominent portfolio risk management and policy implications for investors, risk managers, and policymakers