Behaviour of the Islamic Stock Market in a Prolonged Downturn in the Global Market: Empirical Evidence from Malaysia
DOI:
https://doi.org/10.31436/jif.v4i2.92Abstract
By focusing on Malaysian data, this study investigates the response of the Islamic stock market to changes in major macroeconomic variables such as industrial output, money supply, unemployment rate, exchange rate and foreign interest rate. It focuses on the period from January 2010 to December 2014 to capture the period of a prolonged downturn in the global financial market due to the U.S. financial crisis which started in 2007. The study adopts the co-integration approach of the Auto Regressive Distributed Lag (ARDL) model in order to capture the long-run relationship between the variables. The results show that the Islamic stock price reacts positively to the domestic factors, namely industrial activities, money supply, unemployment rate and real effective exchange rate disturbances. Interestingly, it reacts negatively to the foreign interest rate, suggesting investors’ “flight to quality†behaviour during a downturn in the global equity market.
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References
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Maysami, R. C., & Koh, T. S. (2000). A vector error correction model of the Singapore stock market. International Review of Economics & Finance, 9(1), 79-96.
McQueen, G., & Roley, V. V. (1993). Stock prices, news, and business conditions. Review of Financial Studies, 6(3), 683-707.
Mukherjee, T. K., & Naka, A. (1995). Dynamic relations between macroeconomic variables and the Japanese stock market: an application of a vector error correction model. Journal of Financial Research, 18(2), 223-37.
Orphanides,A Thanasios, (1992). When good news is bad news: Macroeconomic news and the stock market. Working paper, Board of Governors of the Federal Reserve System.
Pesaran, M. H., Shin, Y., & Smith, R. J. (1996). Testing for the existence of a long-run relationship. DAE Working Paper (No. 9622). Faculty of Economics, University of Cambridge.
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326.
Phylaktis, K., & Ravazzolo, F. (2005). Stock prices and exchange rate dynamics. Journal of International Money and Finance, 24(7), 1031-1053.
Poon, S. H., & Taylor, S. J. (1992). Stock returns and volatility: an empirical study of the UK stock market. Journal of Banking & Finance, 16(1), 37-59.
Reilly, F., & Brown, K. (2011). Investment analysis and portfolio management. Cengage Learning.
Roll, R. (1992). Industrial structure and the comparative behaviour of international stock market indices. The Journal of Finance, 47(1), 3-41.
Shanken, J., & Weinstein, M. I. (2006). Economic forces and the stock market revisited. Journal of Empirical Finance, 13(2), 129-144.
Trahan, F., & Krantz, K. (2011). The Era of Uncertainty: Global Investment Strategies for Inflation, Deflation, and the Middle Ground. John Wiley & Sons.
Wongbangpo, P., & Sharma, S. C. (2002). Stock market and macroeconomic fundamental dynamic interactions: ASEAN-5 countries. Journal of Asian Economics, 13(1), 27-51.
Yusof, R. M., & Majid, M. S. A. (2007). Macroeconomic variables and stock returns in Malaysia: An application of the ARDL bound testing approach. Savings and Development, 449-469.
Al-Khazali, O., Lean, H. H., & Samet, A. (2014). Do Islamic stock indexes outperform conventional stock indexes? A stochastic dominance approach. Pacific-Basin Finance Journal, 28, 29-46.
Asprem, M. (1989). Stock prices, asset portfolios and macroeconomic variables in ten European countries. Journal of Banking & Finance, 13(4), 589-612.
Bahmani-Oskooee, M., & Ng, R. W. (2002). Long-run demand for money in Hong Kong: an application of the ARDL model. International Journal of Business and Economics, 1(2), 147-155.
Bank Negara Malaysia. (2014). Monthly Statistical Bulletin, various issues. Kuala Lumpur, Malaysia.
Bernanke, B. (2014). Monetary policy and the stock market: Some empirical results. London School of Economics Public Lecture, London, England, October 9, 2003. Retrieved August 25, 2014. http://www.federalreserve.gov/boarddocs/Speeches/2003/20031002/default.htm
Binswanger, M. (2004). Stock returns and real activity in the G-7 countries: did the relationship change during the 1980s? Quarterly Review of Economics and Finance, 44(2), 237-246.
Fama, E. F., & French, K. R. (1992). The crossâ€section of expected stock returns. The Journal of Finance, 47(2), 427-465.
Boyd, J. H., Hu, J., & Jagannathan, R. (2005). The stock market's reaction to unemployment news: Why bad news is usually good for stocks. The Journal of Finance, 60(2), 649-672.
Bulmash, S. B., & Trivoli, G. W. (1991). Time-lagged interactions between stocks prices and selected economic variables. The Journal of Portfolio Management, 17(4), 61-67.
Chen, N. F., Roll, R., & Ross, S. A. (1986). Economic forces and the stock market. Journal of Business, 59(3), 383-403.
Chiang, T. C., & Yang, S. Y. (2003). Foreign exchange risk premiums and time-varying equity market risks. International Journal of Risk Assessment and Management, 4(4), 310-331.
Dewandaru, G., Rizvi, S. A., Sarkar, K., Bacha, O., & Masih, M. (2014). How do macroeconomic changes impact Islamic and conventional equity prices? Evidence from developed and emerging countries. MPRA Papers.
Dhakal, D., Kandil, M., & Sharma, S. C. (1993). Causality between the money supply and share prices: a VAR investigation. Quarterly Journal of Business and Economics, 32(3), 52-74.
Duasa, J. (2007). Determinants of Malaysian trade balance: an ARDL bound testing approach. Global Economic Review, 36(1), 89-102.
Fama, E. F., & French, K. R. (1992). The crossâ€section of expected stock returns. The Journal of Finance, 47(2), 427-465.
Gay Jr, R. D. (2011). Effect of macroeconomic variables on stock market returns for four emerging economies: Brazil, Russia, India, and China. International Business & Economics Research Journal, 7(3).
Habibullah, M. S., & Baharumshah, A. Z. (1996). Money, output and stock prices in Malaysia: an application of the cointegration tests. International Economic Journal, 10(2), 121-130.
Hamao, Y. (1988). An empirical examination of the arbitrage pricing theory: using Japanese data. Japan and the World economy, 1(1), 45-61.
Hosseini, S. M., Ahmad, Z., & Lai, Y. W. (2014). The role of macroeconomic variables on stock market index in China and India. International Journal of Economics and Finance, 3(6), 233-243.
Hussin, M., Yahya, M., Muhammad, F., & Awang, S. A. (2012). Macroeconomic variables and Malaysian Islamic stock market: a time series analysis. The Journal of Business Studies Quarterly (JBSQ), 3(4), 1-13.
Ibrahim, M. H., & Yusoff, S. W. (2001). Macroeconomic variables, exchange rate and stock price: A Malaysian perspective. International Journal of Economics, Management and Accounting, 9(2), 141-163.
Ibrahim, M. H., & Aziz, H. (2003). Macroeconomic variables and the Malaysian equity market: A view through rolling subsamples. Journal of Economic Studies, 30(1), 6-27.
Kassim, S. H., & Manap, T. A. A. (2008). The information content of the Islamic interbank money market rate in Malaysia. International Journal of Islamic and Middle Eastern Finance and Management, 1(4), 304-312.
Kwon, C. S., & Shin, T. S. (1999). Cointegration and causality between macroeconomic variables and stock market returns. Global Finance Journal, 10(1), 71-81.
Liew, V. K. S. (2004). Which lag length selection criteria should we employ? Economics Bulletin, 3(33), 1-9.
Liljeblom, E., & Stenius, M. (1997). Macroeconomic volatility and stock market volatility: empirical evidence on Finnish data. Applied Financial Economics, 7(4), 419-426.
Majid, M. S. A., & Yusof, R. M. (2009). Long-run relationship between Islamic stock returns and macroeconomic variables: An application of the autoregressive distributed lag model. Humanomics, 25(2), 127-141.
Maysami, R. C., & Koh, T. S. (2000). A vector error correction model of the Singapore stock market. International Review of Economics & Finance, 9(1), 79-96.
McQueen, G., & Roley, V. V. (1993). Stock prices, news, and business conditions. Review of Financial Studies, 6(3), 683-707.
Mukherjee, T. K., & Naka, A. (1995). Dynamic relations between macroeconomic variables and the Japanese stock market: an application of a vector error correction model. Journal of Financial Research, 18(2), 223-37.
Orphanides,A Thanasios, (1992). When good news is bad news: Macroeconomic news and the stock market. Working paper, Board of Governors of the Federal Reserve System.
Pesaran, M. H., Shin, Y., & Smith, R. J. (1996). Testing for the existence of a long-run relationship. DAE Working Paper (No. 9622). Faculty of Economics, University of Cambridge.
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326.
Phylaktis, K., & Ravazzolo, F. (2005). Stock prices and exchange rate dynamics. Journal of International Money and Finance, 24(7), 1031-1053.
Poon, S. H., & Taylor, S. J. (1992). Stock returns and volatility: an empirical study of the UK stock market. Journal of Banking & Finance, 16(1), 37-59.
Reilly, F., & Brown, K. (2011). Investment analysis and portfolio management. Cengage Learning.
Roll, R. (1992). Industrial structure and the comparative behaviour of international stock market indices. The Journal of Finance, 47(1), 3-41.
Shanken, J., & Weinstein, M. I. (2006). Economic forces and the stock market revisited. Journal of Empirical Finance, 13(2), 129-144.
Trahan, F., & Krantz, K. (2011). The Era of Uncertainty: Global Investment Strategies for Inflation, Deflation, and the Middle Ground. John Wiley & Sons.
Wongbangpo, P., & Sharma, S. C. (2002). Stock market and macroeconomic fundamental dynamic interactions: ASEAN-5 countries. Journal of Asian Economics, 13(1), 27-51.
Yusof, R. M., & Majid, M. S. A. (2007). Macroeconomic variables and stock returns in Malaysia: An application of the ARDL bound testing approach. Savings and Development, 449-469.
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Published
2015-11-17
How to Cite
Mustafa, S. A., Ramlee, R., & Kassim, S. H. (2015). Behaviour of the Islamic Stock Market in a Prolonged Downturn in the Global Market: Empirical Evidence from Malaysia. Journal of Islamic Finance, 4(2). https://doi.org/10.31436/jif.v4i2.92
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