VOLATILITY SWITCHING IN THE INITIAL CRISIS PERIOD OF THE COVID-19 PANDEMIC: COMPARING ISLAMIC STOCK AND CONVENTIONAL STOCK INDEXES FOR BORSA ISTANBUL

Abstract

The objective of this research is to examine the volatility structure of both Islamic and conventional indexes at Borsa Istanbul (BIST) in Turkey. Specifically, the study analyzes BIST's KATLM 30 (Islamic index), BIST 30, and BIST 100 Index and compares their return and risk performance during the initial crisis period of the COVID-19 pandemic. The research investigates the stock market's volatility structure under various conditions by utilizing the Markov regime switching autoregressive moving average generalized autoregressive conditional heteroskedasticity (MS-ARMA-GARCH) models with two regimes. The analysis aims to identify low and high volatility regimes in the stock indexes. The study shows that the returns of all three BIST indexes vary in terms of regime change. However, the changes in the conventional indexes (BIST 30 and BIST 100) are higher than those of the Islamic index, with losses during high volatility periods being almost 4-7 times greater than gains during low volatility periods. The research demonstrates that the change in returns from BIST 100 and BIST 30 between different regimes is higher than that of KTLM. In addition to comparing returns, the study also examines the resilience of both conventional and Islamic indexes during crises. These results provide insights into the behavior of stock market indexes during periods of economic turmoil and contribute to the existing literature on the subject.