This study investigates the differential responses of Islamic and conventional stocks to macroeconomic shocks in Iran, focusing on the impact of trade-related shocks – specifically, changes in exports and imports – on stock market efficiency. We analyze a comprehensive dataset spanning from 1990 to 2021 using a Panel Vector Autoregressive (PVAR) model, capturing the dynamic interactions between macroeconomic variables and stock returns for both Islamic and conventional markets. Our findings reveal that macroeconomic shocks significantly influence stock returns in both market types; however, Islamic stocks exhibit greater resilience, characterized by lower volatility and a more muted response to shocks compared to conventional stocks. This resilience is attributed to the ethical and risk-sharing principles underpinning Islamic finance, which promote stability and reduce susceptibility to external economic fluctuations. The study also highlights that the impact of macroeconomic shocks on Islamic stocks diminishes over time, suggesting a higher degree of market efficiency and faster recovery from disturbances. In contrast, conventional stocks demonstrate a persistent reaction to shocks, reflecting inefficiencies and heightened vulnerability to external economic pressures. The study highlights the potential of Islamic stocks as a stable investment option during economic uncertainty, offering diversification and risk mitigation benefits, and emphasizes the need to foster Islamic financial market growth for financial stability. This study explores the differences in economic response of Islamic and conventional stocks, providing practical insights for investors, portfolio managers, and policymakers seeking improved returns and reduced risks.

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