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Modeling the volatility of DJIM equity indices: a fundamental analysis using quantile regression

Mongi Arfaoui (Department of Finance and Accounting, Faculty of Economics and Management, University of Monastir, Tunisia RIM-RAF Lab. UR13ES56, ESC Tunis, University of Manouba, Tunisia)
Aymen Ben Rejeb (Department of Finance and Accounting, Higher Institute of Management of Sousse, University of Sousse, Tunisia, Member of LAMIDED, ISG Sousse, University of Sousse, Tunisia)

International Journal of Islamic and Middle Eastern Finance and Management

ISSN: 1753-8394

Article publication date: 18 December 2020

Issue publication date: 4 June 2021




This paper aims to investigate the behavior of volatility of Islamic equity indices toward fundamental risk factors. It focuses on the degree and structure of sensitivity to commodity price changes, global risk perception and term premium and whether crises and fragility periods have shaped the degree and structure of this sensitivity.


Quantile regression incorporating structural changes and GARCH-class model are used to establish how sensitivities are varying across volatility distribution depending on global events. The data are daily series of return indices, over the period spanning from January 1, 2001 until January 22, 2018.


The results show significant sensitivity to fundamental factors. The sensitivity is identified for different regional indices and intensified across quantiles. Speculation has shaped the structure of sensitivity at normal time, but correction holds at time of crisis. The results reveal that even if they share common features, commodities cannot be considered as homogeneous asset class. Indeed, the exact relationship cannot be observed at normal time in presence of speculation and information delay. However, at time of financial fragility and periods of crisis, the sensitivity is assigned with the plausible sign.

Practical implications

The obtained results present several policy implications as well for academics, portfolio managers and policy-makers. It opens new research paths for academic research, it helps in investment decisions, provides lessons for portfolio diversification, both for price discovery and hedging. The results serve as well to implement effective macroeconomic stabilization policies and even fiscal policies to counteract any inflationary impact of fundamental price changes on investors and Islamic banks.


This paper contributes to empirical literature by dealing with the sensitivity of Islamic equity indices to commodity prices and term premium along with the effect of investor sentiment. It pays attention to the financial stability of Islamic stock markets by investigating the sensitivity at normal time, during fragility periods and periods of crisis. It considers the financialization process of commodity markets and includes the term premium to control for rational expectations on term structure of interest rates and the VIX (Volatility index) as global risk perception to control for safety and risk aversion.



Arfaoui, M. and Ben Rejeb, A. (2021), "Modeling the volatility of DJIM equity indices: a fundamental analysis using quantile regression", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 14 No. 3, pp. 482-505.



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