Assessing Volatilities of Monetary Policy and their Effects on the Islamic and Conventional Stock Markets in Indonesia

M Shabri Abd Majid


The main objective of this study is to empirically assess the volatilities of the monetary policy instruments and their effects on the Indonesian Islamic and conventional stock market. The changes in exchange rate, interest rates, and money supply and their effects on the stock markets are investigated using the using the Generalized Autoregressive Conditional Heteroskedasticity frameworks. As a big-open economy, the capital market of Indonesia is vulnerable to the global monetary shocks changes, thus the US federal funds rate is also incorporated into the GARCH model. The study documented that, with the exception of the US interest rate, the volatilities of all monetary policy variables of interest rate, exchange rate, and money supply were documented affecting the volatilities of both Islamic and conventional stock markets. These findings imply that the volatilities of Islamic and conventional stock markets have similar determinants, thus to stabilize the markets, the investigated monetary policy variables should be controlled for by the policy-makers. Any monetary policy design imposed by the policy-makers would have a similar effect on both conventional and Islamic stocks in Indonesia.

DOI: 10.15408/sjie.v7i2.7352


volatility; Islamic vs. conventional stocks; monetary policy; GARCH.

Full Text:



Abdul Rahim, F., Ahmad, N., & Ahmad, I. (2009). Information Transmission Between Islamic Stock Indices in South East Asia. International Journal of Islamic and Middle Eastern Finance and Management. Vol. 2(1): 7-19. doi: 230.

Aggarwal, R., Inclan, C., & Leal, R. (1999). Volatility in Emerging Stock Markets. Journal of Financial and Quantitative Analysis. Vol. 34(1): 33-55.

Ahmed, A. E. M., & Suliman, S. Z. (2011). Modeling Stock Market Volatility Using GARCH Models: Evidence From Sudan. International Journal of Business and Social Science. Vol. 2(23): 114-128

Ahmed, F., Awais, I., & Pervaiz, A. (2016). Modeling Volatility for Conventional and Islamic Stock Market Indices. Journal of Independent Studies & Research: Management & Social Sciences & Economics. Vol. 14(1): 1-2

Akgiray, V. (1989). Conditional heteroscedasticity in Time Series of Stock Returns: Evidence and Forecast. The Journal of Business. Vol. 62(1): 55-80.

Antonio, M. S., Hafidhoh, H., & Fauzi, H. (2013). The Islamic Capital Market Volatility: a Comparative Study Between Indonesia and Malaysia. Bulletin of Monetary Economics and Banking. Vol. 15(4): 377-400.

Azmat, S., Azad, A. S., Ghaffar, H., & Bhatti, I. (2015). Why Interest-free Islamic Banking is not Free From Interest?. Working Paper, Deakin University, 1-25.

Bappenas. (2017). Siaran Pers: Komite Nasional Keuangan Syariah untuk Percepatan Pengembangan Ekonomi dan Keuangan Syariah di Indonesia (Press Release: Sharia National Finance Committee for the Acceleration of Shariah Economic and Financial Development in Indonesia). Retrieved from:

Bollerslev, T. (1986). Generalized Autoregressive Conditional Heteroskedasticity. Journal of Econometrics. Vol. 31(3): 307-327. doi:

Bollerslev, T., Chou, R. Y., & Kroner, K. F. (1992). ARCH Modeling in Finance: A Review of The Theory and Empirical Evidence. Journal of Econometrics. Vol. 52(1-2): 5-59. doi:

Choudhry, T. (1996). Stock Market Volatility and The Crash of 1987: Evidence From Six Emerging Markets. Journal of International Money and Finance. Vol. 15(6): 969-981. doi:

Chong, B. S., & Liu, M. H. (2009). Islamic Banking: Interest-Free or Interest-Based?. Pacific-Basin Finance Journal. Vol. 17(1): 125-144. doi:

Dewandaru, G., Rizvi, S. A. R., Masih, R., Masih, M., & Alhabshi, S. O. (2014). Stock Market Co-movements: Islamic Versus Conventional Equity Indices with Multi-Timescales Analysis. Economic Systems. Vol. 38(4): 553-571.

Hammoudeh, S., & Li, H. (2008). Sudden Changes in Volatility in Emerging Markets: The Case of Gulf Arab Stock Markets. International Review of Financial Analysis. Vol. 17(1): 47-63. doi:

Humpe, A., & Macmillan, P. (2009). Can Macroeconomic Variables Explain Long-term Stock Market Movements? A Comparison of The US and Japan. Applied Financial Economics. Vol. 19(2): 111-119. doi:

Ibrahim, M. H. (2002). Volatility Interactions Between Stock Returns and Macroeconomic Variables: Malaysian Evidence. Savings and Development. Vol. 26(2): 183-195.

Liljeblom, E., & Stenius, M. (1997). Macroeconomic Volatility and Stock Market Volatility: Empirical Evidence on Finnish Data. Applied Financial Economics. Vol. 7(4): 419-426. doi:

Kassim, S. H., & Majid, M. S. A. (2010). Impact of Financial Shocks on Islamic Banks: Malaysian Evidence During 1997 and 2007 Financial Crises. International Journal of Islamic and Middle Eastern Finance and Management. Vol. 3(4): 291-305. doi:

Khan, F. (2010). How ‘Islamic ‘is Islamic banking?. Journal of Economic Behavior & Organization. Vol. 76(3): 805-820. doi:

Majdoub, J., & Mansour, W. (2014). Islamic Equity Market Integration and Volatility Spillover Between Emerging and US Stock Markets. The North American Journal of Economics and Finance. Vol. 29(C): 452-470.

Majeed, M. T., & Zainab, A. (2017). How Islamic is Islamic banking in Pakistan?. International Journal of Islamic and Middle Eastern Finance and Management. Vol. 10(4): 470-483. doi:

Majid, M. (2016). The Short-run and Long-run Relationship in The Indonesia Islamic Stock Returns. Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics). Vol. 8(1): 1-18. doi:

Majid, M., & Yusof, R. M. (2009). Long-run Relationship Between Islamic Stock Returns and Macroeconomic Variables: An Application of The Autoregressive Distributed Lag Model. Humanomics. Vol. 25(2): 127-141. doi:

Mishkin, F. S., & Eakins, S. G. (2006). Financial markets and institutions. New Delhi: Pearson Education India.

Muradoglu, G., Berument, H., & Metin, K. (1999). Financial Crisis and Changes in Determinants of Risk and Return: An Empirical Investigation of an Emerging Market (ISE). Multinational Finance Journal. Vol. 3(4): 223-252.

Morelli, D. (2002). The Relationship Between Conditional Stock Market Volatility and Conditional Macroeconomic Volatility: Empirical Evidence Based on UK Data. International Review of Financial Analysis. Vol. 11(1): 101-110.

Poon, S. H., & Taylor, S. J. (1992). Stock Returns and volatility: an empirical study of the UK stock market. Journal of Banking & Finance. Vol. 16(1): 37-59. doi:

Pratama, Y. C., & Azzis, A. (2017). Macroeconomic Variables, International Islamic Indices, and The Return Volatility in Jakarta Islamic Index. Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics). Vol. 10(1): 171-188. doi:

Romli, N., Mohamad, A. A. S., & Yusof, M. F. M. (2012). Volatility Analysis of FTSE Bursa Malaysia: Study of the Problems of Islamic Stock Market Speculation in The Period 2007 to 2010. African Journal of Business Management. Vol. 6 (29): 84-90.

Rose, P. S. (2000). Money and Capital Markets. 7th Edition. New York: Irwin McGraw – Hill.

Saadaouia, A., & Boujelbene, Y. (2015). Volatility Transmission Between Dow-Jones Stock Index and Emerging Islamic Stock Index: Case of Subprime Financial Crises. Journal of Emerging Economies and Islamic Research. Vol. 3(1): 1-9.

Shamsuddin, A. (2014). Are Dow Jones Islamic Equity Indices Exposed to Interest Rate Risk?. Economic Modelling. Vol. 39: 273-281. doi: 2014.03.007.

Tanjung, H. (2014). Volatility of Jakarta Islamic Index. Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah (Journal of Islamic Economics). Vol. 6(2): 207-222. doi:

Webley, P., Lewis, A., & Mackenzie, C. (2001). Commitment Among Ethical Investors: An Experimental Approach. Journal of Economic Psychology. Vol. 22(1): 27-42. doi:

Yusof, E. F. E. (2008). Are Islamic banks in Malaysia really ‘Islamic’?. MPRA Paper. No. 20901. Retrieved from:

Yusof, R. M., & Majid, M. S. A. (2006). Policy and Persistence of Stock Returns Volatility: Conventional Versus Islamic Stock Market. Journal of International Business and Entrepreneurship. Vol. 12(1): 49-68.

Yusof, R. M., & Majid, M.S.A. (2007). Stock Market Volatility Transmission in Malaysia: Islamic Versus Conventional Stock Market. JKAU: Islamic Economics. Vol. 20(2): 17-35.

Zakaria, Z., & Shamsuddin, S. (2012). Empirical Evidence on the Relationship Between Stock Market Volatility and Macroeconomics Volatility in Malaysia. Journal of Business. Vol. 4(2): 61-71.



  • There are currently no refbacks.

research database

View My Stats