The COVID-19 pandemic and ethical stock markets: further evidence of moral shock

ABSTRACT

The aim of this study is twofold. First, we assess the evolution of stock returns for two classes of ethical investments—Islamic and sustainable funds—from September 2001–January 2021. This is the first study of the financial performance of ethical investments in a period covering technological (the dot-com bubble in 2000), financial (the 2008 financial crisis), and healthcare shocks (the COVID-19). Second, we analyze the dynamics of the financial returns of conventional and ethical ethnic markets in the COVID-19 context and model the impact of COVID-19 news. We perform different time-varying tests to apprehend market reactions to the COVID-19 pandemic. We present two interesting results. First, the COVID-19 pandemic has had a time-varying impact on the stock market. Basically, a close to zero effect at the early stage of the pandemic, followed by a negative and significant effect during the first wave from March 2020 to June 2020, was observed. However, this has since been attenuated owing to social restriction measures, teleworking, government stimulus policies, and massive vaccine rollouts. Second, among all markets, the Islamic stock market is the most resilient and least impacted by the pandemic, suggesting evidence of a new moral shock.

KEYWORDS:

• Islamic and sustainable stock returns
• COVID-19
• ARX-GARCH model
• breaks
• moral shock

JEL CLASSIFICATION:

• C22
• G15

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 See Jawadi, Arouri, and Nguyen (2010), Jawadi and Arouri (2011) and Arouri, Jawadi, and Nguyen (2012) for a Survey on Financial Integration.

2 See Jawadi, Cheffou, and Jawadi (2015b), Jawadi et al. (2018), Jawadi, Jawadi, and Cheffou (2019) and Jawadi, Jawadi, and Idi Cheffou (2020) for more details about the specificities of Islamic Finance and its potential.

3 We do not report the results of the unit root tests to save space, but they are available upon request.

4 Overall, for the whole sample, the correlation between the conventional and Islamic index is about 86.99% against 95.40% for the conventional-sustainable indices.