Islamic Holidays and Asymmetric Volatility in the Malaysian Stock Market: Evidence from Conventional and Shariah-Compliant Indices

Abstract

This study examines whether Islamic holidays generate asymmetric volatility and leverage effects in the Malaysian stock market, with particular attention to differences between conventional and Shariah-compliant equity indices. Using daily data from 2018 to 2023, the analysis covers the FTSE Bursa Malaysia KLCI and three Shariah compliant indices, Hijrah Shariah, Emas Shariah, and Small Cap Shariah. A structured event-window approach is employed, distinguishing between two trading days before and two trading days after Islamic holidays to capture short-term anticipation and post-holiday adjustment effects. Preliminary Ordinary Least Squares results suggest that return effects around Islamic holidays are generally weak and short-lived. To assess risk dynamics more rigorously, the study applies asymmetric volatility models that allow negative and positive shocks to affect volatility differently. The findings provide strong evidence of volatility asymmetry and leverage effects around Islamic holidays, particularly in the immediate pre- and post-holiday windows. Negative shocks are shown to exert a disproportionately larger impact on conditional volatility than positive shocks of similar magnitude. Importantly, asymmetric volatility effects are more pronounced in Shariah-compliant indices, especially among smaller-capitalization stocks, indicating heightened downside-risk sensitivity in Islamic market segments. These results highlight the importance of accounting for volatility asymmetry when evaluating religious calendar effects and offer practical implications for short-horizon risk management, portfolio allocation, and trading strategies around Islamic holidays.