Geopolitical risk and Islamic stock market dynamics: evidence from Indonesia

Purpose This paper aims to examine how geopolitical risks impact the performance of Islamic stock returns in Indonesia, focusing on the Jakarta Islamic Index (JII) and the Indonesia Sharia Stock Index (ISSI). Design/methodology/approach The study applies a quantitative approach, utilizing the dynamic conditional correlation model with the generalized autoregressive conditional heteroskedasticity (GARCH) framework. Daily stock return data from May 2011 to June 2022 are analyzed alongside first-differenced geopolitical risk indices (GPR Acts and GPR Threats). Stationarity is confirmed through augmented Dickey–Fuller tests, and the robustness of results is validated using out-of-sample Theil’s U statistics. Findings Findings reveal that GPR Threats significantly and negatively affect both JII and ISSI returns, reflecting increased investor risk aversion during periods of uncertainty. GPR Acts negatively impact JII returns but positively influence ISSI returns, suggesting sectoral diversification and defensive reallocation effects within the broader Islamic equity market. Research limitations/implications The study highlights the importance of integrating geopolitical risk assessments into investment strategies and calls for adaptive regulatory frameworks to strengthen the resilience of Islamic financial markets. Future research could extend this analysis by incorporating macroeconomic variables and behavioral dimensions to further enrich understanding. Originality/value This study contributes to the limited literature on geopolitical risk and Islamic finance, offering new insights into how different types of geopolitical uncertainty affect Islamic stock markets in emerging economies.