Global risk aversion and returns from faith-based assets across market conditions

Abstract This study renders an empirical documentation of the resilience of Islamic stocks, from various sectors of economic activity, as a safe-haven and hedge against global risk aversion (GRA) during bullish, normal, and bearish market conditions. Using the causality-in-quantiles and quantile regression techniques, the analysis reveals that (i) GRA significantly predicts the returns from Islamic stocks across quantiles, (ii) faith-based stocks belonging to both the “real” and “services-driven” sectors retain their safe-haven and hedge attributes against GRA across various economic conditions, and (iii) assets from the real sector are more attractive than those from the services-driven sector. These findings underscore the importance of sectoral composition in determining the effectiveness of faith-based assets as risk mitigation tools. Moreover, the asymmetric and nonlinear dependence structures observed across quantiles suggest that investors' preferences for Islamic equities are heightened during periods of elevated global uncertainty. The study contributes to the growing body of literature on ethical investing by offering fresh insights into the dynamic relationship between global risk aversion and the performance of Islamic financial instruments. Policy implications are discussed for portfolio managers, institutional investors, and regulators aiming to enhance market stability through diversification into resilient, faith-based asset classes.