Risk Dynamics and Volatility in Islamic Stock Indices: A Literature Review of Islamic Value-Based Mitigation Models

Abstract

Sharia stock indices such as the Jakarta Islamic Index (JII) and the Indonesia Sharia Stock Index (ISSI) face challenges due to the inherent risk and volatility dynamics of the modern capital market, despite the rapid growth of the sharia capital market as an investment alternative based on Islamic moral and spiritual values. The purpose of this literature review is to examine how Islamic principles can contribute to the creation of a risk mitigation model aligned with the values of maqāṣid al-syarī‘ah. Previous research indicates that most risk studies still focus on technical aspects such as Value at Risk (VaR), the Capital Asset Pricing Model (CAPM), or GARCH, without considering ethical and spiritual aspects, which is unreasonable. The Islamic approach to risk emphasizes that effort and trust in God must be balanced, and the principle of al-ghunmu bil-ghurmi, which means profit is proportional to risk, is the basis of investment justice. In situations like this, risk management is not just an effort to avoid losses; it is a process that ensures integrity, fairness, and well-being. According to research, applying principles such as trust, justice, and public interest can improve market regulations and reduce speculative behavior that causes uncertainty. Additionally, transparency, also known as Kashf al-Gharar, and the avoidance of maysir are also used as moral instruments to maintain the stability of the Islamic capital market. In this article, there is little research on how to combine the concept of risk jurisprudence with contemporary quantitative models. There hasn't been much previous research combining Islamic financial theory and behavioral approaches also known as behavioral finance for risk mitigation. Therefore, this article offers a new avenue for research on the concept of the "Islamic Risk Mitigation Model," which is rooted in the maqāṣid al-syarī‘ah and the principle of distributive justice. The purpose of this project is to strengthen the resilience of the Islamic capital market against global economic changes. Therefore, this research helps build a new paradigm for risk management that is morally good, fair, and spiritually sustainable.