Nonlinear Relationships between Economic Policy Uncertainty, Oil Price, and Islamic Stock Returns in Indonesia: A NARDL Approach
Abstract
This article investigates whether global economic policy uncertainty (EPU) and international oil-price movements influence Islamic stock returns in Indonesia differently when shocks move upward or downward. Monthly observations covering January 2016 to July 2025 are examined using the Nonlinear Autoregressive Distributed Lag (NARDL) model. The approach separates positive and negative changes in EPU and oil prices, allowing their short-run and long-run effects to be assessed independently. This study contributes evidence on the asymmetric transmission of these two global factors to the Indonesian Islamic equity market, an issue that remains underexplored. The estimates confirm a long-run relationship among the variables. Lower EPU is associated with a significant improvement in Islamic stock returns over the long run, whereas higher EPU does not produce a statistically significant effect. Although the separate long-run coefficients for oil-price increases and decreases are insignificant, the Wald test confirms that their effects are not equal. In the short run, oil-price declines generate a stronger return response than oil-price increases. Dynamic multiplier estimates also show that the adjustment of Islamic stock returns differs according to the direction of EPU and oil-price shocks. These results indicate that reduced global policy uncertainty is particularly relevant to long-term Islamic investment decisions.
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References
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