Financial Stability in Islamic and Conventional Financial Markets from a Bubble Perspective; A Theoretical and Experimental Analysis of Indonesia

Abstract

One of the causes of financial crisis is the formation of price bubbles. In the economic literature, the deviation of stock prices from their long-term equilibrium has been introduced as a bubble that causes instability in financial markets and may, in some cases, lead to stock market crash and economic recession. The purpose of this article is to study the process of price bubble formation in conventional financial markets and to prove the claim that in the Islamic financial market there are fewer grounds for this. For this purpose, after theoretically proving the claim using Generalized Sup Augmented Dickey–Fuller (GSADF) and ARMA method and estimating the risk function based on logistic regression, the bubble in the conventional and Islamic financial market of Indonesia was investigated. The results show that despite the price bubble in the conventional and Islamic financial markets, its average and standard deviation in the former is much lower than in the latter.

Keywords

• bubble price
• financial economics
• islamic economics
• supreme
• dickey–fuller
• arma