Asymmetric Effects of Shariah ESG Indices on Islamic Volatility: A QARDL Approach

Abstract

This study examines the evolving dynamics of volatility in Islamic financial markets by exploring how Shariah-compliant ESG indices from developed and emerging markets influence the Islamic Volatility Index (IVIX) over different quantiles. Covering the period from April 30, 2015, to May 23, 2025, the analysis is situated within a theoretical framework that examines the interactions between volatility and ethical investment instruments aligned with Islamic principles. The key economic variables include the Dow Jones Islamic Market World Low Volatility Index as the dependent variable and two independent indices: the S&P Developed LargeMidCap ESG Shariah Index and the S&P Emerging LargeMidCap ESG Shariah Index. To capture the potential asymmetric and nonlinear relationships in different market regimes, the study employs the QARDL model. This allows for a decomposition of short- and long-run effects at different points in the conditional distribution of the dependent variable. The results presented in this study yield insights of a statistically significant positive influence of both ESG indices on IVIX at all quantiles. Stronger long-term effects are visible in low regime periods. On the contrary, short-term effects are more prominent in the high regime. Results discovered in this study, warrant the need for location-based methods in detecting asymmetries in Islamic financial markets. Moreover, it suggests that ESG investments under Shariah principles have a stabilizing market regime in the Shariah-compliant finance literature. This study further added to the material studying the relationship between volatility and ethics in Islamic finance under different regimes.