Macroeconomic Variables and Islamic Bank Stock Returns: Panel Data Evidence From GCC Countries

  • Abdesslam Menacer Islamic Business School, Islamic Finance and Banking Othman Yeop Abdullah Graduate School of Business, Universiti Utara Malaysia, Sintok, Kedah Darul Aman, Malaysia
  • Saheed Adebowale Nurein School of Business Innovation and Technopreneurship, Centre for Graduate Studies, Universiti Malaysia Perlis, Kangar, Perlis, Malaysia
Keywords: Macroeconomic, money supply, interest, inflation, exchange.

Abstract

The study provides an empirical evidence of the relationship between macroeconomic variables and bank stock returns in the context of GCC countries using a panel data approach. The data for this study is retrieved from the DataStream World Bank Data archive. The data of 66 banks for the period 2005-2014 was examined using GLS estimation for the analysis. The findings revealed that there is a statistically positive relationship between macroeconomic variables and Islamic bank returns. The positive relationship implies that most banks in the GCC countries engage in numerous off-balance sheet transactions and implement efficient and effective methods of risk management, which reduces their exposure to changes in macroeconomic variables.

References

Abugri, B.A. (2008). Empirical relationship between macroeconomic volatility and stock returns: evidence from Latin American markets. International Review of Financial Analysis, 17. 396-410.
Adam, A. M., & Tweneboah, G. (2008). Do Macroeconomic Variables Play any Role in the Stock Market Movement in Ghana? MPRA Working Paper No. 9368.
Agrawal, G., Srivastav, A.K. & Srivastava, A. (2010). A study of exchange rates movement and stock market volatility. International Journal of Business and Management, 5 (12). 62-73.
Akella, S. R., & Greenbaum, S. I. (1992). Innovations in interest rates, duration trasformation, and bank stock returns. Journal of Money, Credit and Banking, 24(1), 27-42.
Al-Sharkas, A. (2004). The Dynamic Relationship between Macroeconomic Factors and the Jordanian stock market. International Journal of Applied Econometrics and Quantitative Studies, 1(1), 97-114.
Al-Shubiri, F.N. (2010). Analysis of the determinants of market stock price movements: an empirical study of Jordanian commercial banks. International Journal of Business and Management, 5(10,. 137-147.
Arab Times (2008). GCC states to launch joint market today. Retrieved from http://www.arabtimesonline.com/news/
Arestis, P., & Demetriades, P. (1997). Financial development and economic growth: Assessing the evidence. The Economic Journal, 107(442), 783-799.
Asprem, M. (1989). Stock prices, asset portfolios and macroeconomic variables in ten European countries. Journal of Banking and Finance, 13, 589-612.
Bach, G. L., & Ando, A. (1957). The redistributional effects of inflation. The Review of Economics and Statistics, 1-13.
Bae, S.C. (1990). Interest rate changes and common stock returns of financial institutions: revisited, 13, 71–79.
Booth, J., & Officer, D.T. (1985). Expectations, interest rates, and commercial bank stocks. Journal of Financial Research, 8, 51–58.
Brewer, E., & Lee, C. F. (1986). The impact of market, industry, and interest rate risks on bank stock returns (No. 86-4). Federal Reserve Bank of Chicago.
Butt, B. Z, Rehman. K. U., Khan. M. A., & Safwan, N. (2010). Do economic factors influence stock returns? A firm and industry level analysis. African Journal of Business Management, 4(5), 583-593.
Cassola, N., & Morana, C. (2004) Monetary Policy and the Stock Market in the Euro Area. Journal of Policy Modeling, 26, 387-399.
Chamberlain, S., Howe, J. S., & Popper, H. (1997). The exchange rate exposure of US and Japanese banking institutions. Journal of Banking & Finance, 21(6), 871-892.
Chance, D.M., & Lane, W.R. (1980). A re-examination of interest rate sensitivity in the common stocks of financial institutions, Journal of Financial Research, 3, 49–55.
Chen, N. F., Richard, R & Ross, S. A. (1986). Economic forces and the stock market. The Journal of Business, 59(3), 383-403.
Cheng, C.M., Tzeng, Z.C., & Kang, W.L. (2011). The impact of non-macroeconomic events on Taiwan electronic industry stock index returns, Global Economy and Finance Journal, 4 (1), 80-101.
Choi, J. J., Elyasiani, E., & Kopecky, K. J. (1992). The sensitivity of bank stock returns to market, interest and exchange rate risks. Journal of Banking & Finance, 16(5), 983-1004.
Choi, D., & Jen, F. C. (1991). The Relation between Stock Returns and Short-Term Interest Rates. Review of Quantitative Finance and Accounting, 1, 75-89.
Choi, K. H., & Yoon, S. M. (2015). The Effect of Money Supply on the Volatility of Korean Stock Market. Modern Economy, 6(5), 535.
Choudhry, T. (1996). Real stock prices and the long-run money demand function: evidence from Canada and the USA. Journal of International Money and Finance, 15,1-17.
Choudhry, T. (1999). Does interest rate volatility affect the US M1 demand function? Evidence from cointegration. The Manchester School, 67(6), 621-648.
Chude, N.P., & Chude, D.I. (2013). Effect of Money Supply on the Stock Market Returns in Nigeria. Journal of Business and Organizational Development, 5(2), 135-150.
Dornbusch, R & Fischer, S. (1980). Exchange rates and the current account. The American Economic Review, 70 (5). 960-971.
Fama, E.F. (1981). Stock returns, real activity, inflation, and money. American Economy Review, 71, 545–565.
Fama, E. F. (1991). Efficient capital markets: II. The Journal of Finance, 46(5), 1575-1617.
Fama, E. & Schwert, W. (1977). Asset returns and inflation. Journal of Financial Economics, 5, 115- 146.
Firth, M. (1979). The Relationship Between Stock Market Returns and Rates of Inflation, The Journal of Finance, 34(3), 743-749.
Flannery, M., & James, C. (1984). The effect of interest rate changes on the common stock returns of financial institutions. The Journal of Finance, 39, 1141–1153.
Foong, L.K., Lok, T.W. & Hoon, Y.Y. (2012). The impact of macroeconomic variables on banks’ stock returns: evidence from Malaysia. Unpublished BSc. Degree research project. Universiti Tunku AbdulRahman Malaysia.
French, K. R., Ruback, R. S., & Schwert, G. W. (1983). Effects of nominal contracting on stock returns. The Journal of Political Economy, 91(1), 70-96.
Gan, C., Lee, M., Yong, H. H. A., & Zhang, J. (2006). Macroeconomic variables and stock market interactions: New Zealand evidence. Investment Management and Financial Innovations, 3(4), 89-101.
Gay Jr, R. D. (2008). Effect of Macroeconomic Variables on Stock Market Returns for Four Emerging Economies: A Vector Regression Model for Brazil, Russia, India, and China. International Business & Economics Research Journal, 7(3), 1-8.
Geske, R., & Roll, R. (1983). The fiscal and monetary linkage between stock returns and inflation. The Journal of Finance, 38(1), 1-33.
Gilkenson, J., & Smith, S. (1992). The convexity trap: pitfalls in financing mortgage portfolios and related securities. Economic Review. Federal Reserve Bank of Atlanta, 14–27.
Grammatikos. T., Saunders, A., & Swarv, I. (1986). Returns and risks of U.S. bank foreign currency activities, Journal of Finance 41, 671-682.
Gultekin, N. B. (1983). Stock market returns and inflation: evidence from other countries. Journal of Finance, 1, 49-65.
Günsel, N., & S. Çukur (2007). The Effects of Macroeconomic Factors on the London Stock Returns: A Sectoral Approach, International Research Journal of Finance and Economics, 10, 140-152.
Hoguet, G. R. (2008). Inflation and Stock Price, State Street Global Advisors. lobal Advisor http://www.ssga.com/library/esps/Inflation_and_Stock_Prices_George_Hoguet_8.21.08r v3CCRI1221060800.pdf.
Hong, H. (1977). Inflation and the market value of the firm: Theory and tests. The Journal of Finance, 32(4), 1031-1048.
Humpe, A. & Macmillan, P. (2007). Can macroeconomic variables explain long term stock market movements? A comparison of the US and Japan, Centre for Dynamic Macroeconomic Analysis Working Paper Series.
Ihsan, H., Ahmad, E., Ihsan, M., & Sadia, H. (2007). Relationship of economic and financial variables with behavior of stock returns, Journal of Economic Cooperation, 28 (2), 1-24.
Ikoku, A.E. (2007). The Impact of Inflation on Stock Market Returns in Nigeria: Business Day Newspaper, March 3.
Kane, E. J., & Unal, H. (1988). Change in market assessments of deposit-institution riskiness. Journal of Financial Services Research, 1(3), 207-229.
Kasman, S., Vardar, G. & Tunc, G. (2011). The impact of interest rate and exchange rate volatility on banks' stock returns and volatility: Evidence from Turkey. Economic Modelling, 28, 1328-1334.
Keran, M. W. (1971). Expectations, money and the stock market. Federal Reserve Bank of St.Louis Review, 16-31.
Kessel, R. A. (1956). Inflation-caused wealth redistribution: A test of a hypothesis. The American Economic Review, 46(1), 128-141.
Kim, K. (2003). Dollar exchange rate and stock price: evidence from multivariate cointegration and error correction model. Review of Financial Economics, 12, 301-313.
Kim, C., & J. Lee (2004). .Exchange Rate Regimes and Monetary Independence in East Asia. In G. de Brouwer, & M. Kawai (eds) Exchange Rate Regimes in East Asia,. London, Routledge.
Kwan, S. H. (1991). Re-examination of interest rate sensitivity of commercial bank stock returns using a random coefficient model. Journal of Financial Services Research, 5(1), 61-76.
Laurenceson, J. (2002). The impact of stock markets on china's economic development: some preliminary assessments (Discussion Paper No 302), School of Economics, The University of Queensland.
Lloyd, W.P & Shick, R.A. (1977). A test of stone's two-index model of returns, Journal of Financial and Quantitative Analysis, 12, 363–376.
Lynge, M.J. & Zumwalt, J.K., (1980). An empirical study of the interest rate sensitivity of commercial bank returns: a multi-index approach, Journal of Financial and Quantitative Analysis, 15, 731–742.
Maghayereh, A. (2002). Causal Relations among Stock Prices and Macroeconomic Variables in the Small, Open Economy of Jordan. JKAU: Eco. & Adm, 17, 3-12.
Maku, E.O. and Atanda, A.A. (2009). Does Macroeconomic Indicators Exert Shock on the Nigerian Capital Market? Paper No. 17917, Munish Publication, University of Demark.
Maysami, R. C., Howe, L. C., & Hamzah, M. A. (2004). Relationship between Macroeconomic Variables and Stock Market Indices: Cointegration Evidence from Stock Exchange of Singapore’s All-S Sector Indices, Jurnal Pengurusan 24, 47-77.
Merton, R.C. (1973). An intertemporal capital asset pricing model. Econometrica 41, 867–887.
Mollick, A.V. & Assefa, T.A. (2013). U.S. stock returns and oil prices: The tale from daily data and the 2008-2009 financial crisis. Energy Economics. 36, 1-18.
Muradoglu, G. & Metin, K. (1996), Efficiency of the Turkish Stock Exchange with respect to monetary variables: A cointegration analysis, European Journal of Operational Research, 90(3), 566-576.
Muradoglu, G, Metin, K., & Argac, R. (2001). Is there a long run relationship between stock returns and monetary variables: evidence from an emerging market, Applied Financial Economics, 11, 641-649.
Nishat, M. & Shaheen, R. (2004). Macroeconomic Factors and Pakistani Equity Market. The Pakistan Development Review, 43(4), 619-637.
NYSE. (2006). What drives stock prices? Retrieved from: http://www1.nyse.com/pdfs/nyse_chap_04.
Omole, D. A. (1999) Financial Depending and Stock Market Development in Nigeria. Nigerian Institute of Social and Economic Research (NISER), Ibadan. NISER Monograph Series, No. 15.
Opfer, H. & Bessler, W., (2004).University of Giessen, FMA’s E-journal, June.
Osisanwo, B.G. & Atanda, A.A. (2012). Determinants of Stock Market Returns in Nigeria: A Time Series Analysis. African Journal of Scientific Research, 9(1): 479-489.
Ozbay, E. (2009). The relationship between stock returns and macroeconomic factors: evidence for Turkey. Unpublished Dissertation submitted to the University of Exeter, UK.
Ozturk, B. (2008). The Effects of Macroeconomic Factors on Istanbul Stock Exchange National 100 Index and Its Volatility. (1997-2006), Unpublished Thesis submitted to the Istanbul Technical University.
Palepu, K.G., Healy, P.M. & Peek, E. (2010). Business Analysis and Valuation. United Kingdom: Cengage learning.
Peninsula (2015). GCC common market achieves most goals. The Peninsula. 9 January..
Pesando, J. E. (1974). The supply of money and common stock prices: Further observations on the econometric evidence. The Journal of Finance, 29(3), 909-921.
Priestley, R. (1996). The arbitrage pricing theory, macroeconomic and financial factors, and expectations generating processes. Journal of Banking & Finance, 20(5), 869-890.
Ross, S. (1976). The arbitrage theory of capital asset pricing. Journal of Economic Theory, 13, 341-360.
Saunders, A., & Yourougou, P. (1990). Are banks special? The separation of banking from commerce and interest rate risk. Journal of Economics and Business 42, 171–182.
Scott, W.L., & Peterson, R.L. (1986). Interest rate risk and equity values of hedged and unhedged financial intermediaries. Journal of Financial Research 9, 325–329.
Sirucek, M. (2013). The impact of money supply on stock prices and stock bubbles. Available online at http://mpra.ub.uni-muenchen.de/40919/. MPRA Paper No. 40919
Solnik, B., & McLeavey, D. (2009). Global investments, Sixth edition, Boston, Pearson Prentice Hall.
Stowe, J. D., Robinson, T. R., Pinto, J. E., & McLeavey, D. W. (2007), Equity Asset Valuation, New Jersey, John Wiley& Sons, Inc.
Sweeney, R. J., & Warga, A. D. (1986). The Pricing of Interest‐Rate Risk: Evidence from the Stock Market. The Journal of Finance, 41(2), 393-410.
Tursoy, T., Gunsel, T., & Rjoub, H. (2008). Macroeconomic Factors, the APT and the Istanbul Stock Market. International Research Journal of Finance and Economics, 22.
Van Nieuwerburgh, S., Buelens, F., & Cuyvers, L. (2006). Stock market development and economic growth in Belgium. Explorations in Economic History, 43(1), 13-38.
Yau, H. & Nieh, C. (2006). Interrelationships among stock prices of Taiwan and Japan and NTD/Yen exchange rate. Journal of Asian Economics. 17, 535-552.
Yourougou, P. (1990). Interest-rate risk and the pricing of depository financial intermediary common stock: Empirical evidence. Journal of Banking & Finance, 14(4), 803-820.
Published
2017-12-31
How to Cite
Menacer, A., & Nurein, S. (2017). Macroeconomic Variables and Islamic Bank Stock Returns: Panel Data Evidence From GCC Countries. Journal of Islamic Finance, 6, 001-013. Retrieved from http://journals.iium.edu.my/iiibf-journal/index.php/jif/article/view/253
Section
Articles