This paper determines whether volatility shocks are more prevalent among conventional banks than Islamic banks. It further tests the effect of leverage on both the banking systems. The paper uses the Fractionally-Integrated Exponential (FIEGARCH) model in modeling volatility. This allows considering a direct shock-persistence as well as shocks’ asymmetric effect. The paper applied the approach on daily returns of 12 Islamic and 12 conventional banks for the period June 15, 2006 to May 15, 2013 and the results indicate that the impact of shocks is more spread among conventional banks’ volatility compared to Islamic banks, where the volatility effect is rather transitory. Moreover, the paper finds that leverage effect is quasi-absent within Islamic banks compared to the conventional banks. Finally, the results highlight the resilience of Islamic banks with reference to the conventional banks in this regard.

Over the last few decades, financial asset prices have witnessed significant fluctuations, which has shifted the academic research and practitioners’ interest to studying the issue of volatilities of financial markets. In particular, the current crises in financial markets have signaled a great turbulence and exhibited excess volatility in stocks, bonds, currencies, raw materials, commodities and derivatives (Shiller, 2008). More so, the concern arose because of the possible adverse impact that financial instability could have on real economic sphere.

Panda and Deo (2014) analyzed the impact of volatility dynamics between foreign exchange rate and exchange stock market in India. By applying EGARCH model, they find evidence of asymmetric and volatility spillover between these two markets. The after-crisis period proved higher asymmetric and volatility excess with respect to the other periods. This necessitated remodeling of international financial systems. While many studies show that Islamic finance is characterized by its resilience to the current global financial crises1, a few studies show that even Islamic banks are, in turn, affected by such a crisis.

Applied Finance Journal, Islamic Banks, Financial Crisis, Modeling, Long-Memory, Volatilities, Return on Assets (ROA), Return on Equities (ROE), Banks of Bahrain, Qatar and UAE. Further, Islamic banks, Leverage Effect.