How Resilient Are Equity Markets? Efficiency of Islamic and Conventional Indices During COVID-19

Abstract The outbreak of COVID-19 has brought significant uncertainty to financial markets worldwide, prompting renewed interest in the efficiency of various equity indices. This study explores how Islamic and conventional equity indices in eight Asian markets responded to the pandemic in terms of informational efficiency. By applying the Automatic Portmanteau (AQ) Test and the Automatic Variance Ratio (AVR) approach, we assess the validity of the Martingale Difference Hypothesis and the Random Walk Hypothesis across three periods: before, during, and after the pandemic. Our results show that, over the entire sample period, conventional indices were weak-form efficient 62.5% of the time, compared to 37.5% for Islamic indices. Conventional indices generally exhibited higher weak-form efficiency in both the pre-pandemic and post-pandemic periods, while both types of indices displayed similar weak-form efficiency during the pandemic itself. These findings suggest that the efficiency of Asian stock markets is sensitive to major global disruptions, with both Islamic and conventional indices affected during times of crisis. The study offers practical insights for investors and policymakers seeking to understand market behavior and resilience in the face of unprecedented events.