Causality between Malaysian Islamic Stock Market and Macroeconomic Variables

This paper makes an attempt to analyse the causality between Islamic stock market and three macroeconomic variables in the case of Malaysia. Although there are numerous studies investigating relationship between conventional stock market and macroeconomic fundamentals, there is a certain gap in the literature pertaining to the relationship between Islamic indices and macroeconomic variables which are becoming an interesting area of research due to fast growing force of Islamic finance. Thus, this paper examines the long-term equilibrium relationships between FTSE Bursa Malaysia Emas Shariah Index as a proxy for Islamic stock market and three selected macroeconomic variables namely, money supply, consumer price index and exchange rate. The methods applied are the Long run structural modelling, vector error correction and variance decomposition techniques. The stability of the functions has also been tested by CUSUM and CUSUM SQUARE tests. Our findings tend to suggest that there is a cointegration between Islamic stock market and chosen macroeconomic variables and as expected, macroeconomic variables have had influences on Islamic stock market in Malaysia. These findings have policy Implications in that controlling the macroeconomic variables such as, inflation rate, aggregate money supply and exchange rate will help enhance Islamic stock market in Malaysia.