Resilience or contagion? Ex-ante vs ex-post time-varying correlation between conventional, Islamic and sustainable stocks in Indonesia

Abstract

This study aims to examine whether the interconnections among Indonesia’s conventional (financial times stock exchange [FTSE] Indonesia), Islamic (Indonesia stock exchange [IDX] Shariah) and sustainable (SRI-KEHATI) stock indices reflect structural integration or externally driven contagion, and how these linkages evolve across the pre-pandemic, COVID-19 and post-pandemic monetary tightening regimes. This study assesses the extent to which global factors drive local market integration and evaluates the resulting diversification and hedging implications. Using daily data from 2015 to 2025, the study uses a dynamic conditional correlation multivariate GARCH (DCC-MGARCH) framework with student-t innovations. A dual-stage design is used: an ex ante stage that filters global shocks (VIX, Brent oil, USD/IDR) from returns before estimating correlations, and an ex post stage that conditions the estimated correlations on these factors. Empirical credibility is established through Ljung–Box and autoregressive conditional heteroskedasticity – lagrange multiplier (ARCH-LM) diagnostics, asymmetric DCC (ADCC) and 100-day rolling-window correlations, student-t versus Gaussian model selection by AIC and BIC, subsample reestimation across regimes and hedging-effectiveness analysis. Static and dynamic correlations are consistently high and strongly time-varying. The three global factors explain only about 5%–7% of return variance, indicating that the integration is predominantly structural and domestic rather than imported. The ex post regressions show that the correlations are dominated by their own persistence; once persistence is controlled, global volatility (VIX) exerts only a weak, negative (mild decoupling) effect. The clearest dynamic is the progressive decoupling of the Islamic index: the FTSE Indonesia–IDX Shariah correlation falls from about 0.90 before the pandemic to about 0.66 during the 2022–2025 tightening phase, while the conventional–sustainable correlation stays near 0.96–0.98. This emerging resilience is statistically significant across all regimes. Diversification benefits are conditional and regime-dependent. Because the linkages are largely structural, single-asset hedges weaken precisely when decoupling rises, whereas long-only diversification becomes more valuable. The Islamic index is the lowest-volatility, highest risk-adjusted-return series in the sample and anchors the minimum-variance portfolio. Its decoupling during the tightening phase raises the optimal allocation to conventional equities and produces genuine variance reduction absent in calmer periods. Policymakers should deepen the liquidity and breadth of Shariah-compliant and environmental, social and governance (ESG) markets to support these initiatives. This study separates structural integration from contagion by comparing ex ante and ex post DCC-MGARCH models for Indonesia’s conventional, Islamic and sustainable indices. This study demonstrates that the integration of Indonesian ethical indices is mainly intrinsic rather than imported and that the Islamic index displays emerging, regime-dependent resilience rather than static safe-haven behavior.