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Relationship between regional Shariah stock markets: The cointegration and causality

Yildirim, Ramazan and Masih, Mansur (2013): Relationship between regional Shariah stock markets: The cointegration and causality.

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Abstract

This paper investigates the relative importance of the global and regional markets affecting Asian financial market, the cross-market transmission mechanism between the stock markets, and the Asian market responses to the global financial crises in 2008. It’s objective is to answer whether there is a cointegration among the selected 5 regional stock markets – Asia, USA, Europe, BRIC and Arabian; especially their Shariah Indices. In case a cointegration exist, which of the 5 financial markets are the most leader (exogenous) or most follower (endogenous) and whether specifically the Asian market is influenced by this cointegration. Lastly this paper will try to emphasize the implications to the Asian Islamic investors. (e.g. Portfolio Management, Strategic Investment Management). This paper applies the eight steps of time series techniques based on the 5 years daily data, from 04/2008 to 09/2013. Time series econometrics has been selected, since is better than regression approach, because it tested long term theoretical relationship between the variables rather than making any early assumption of such relationship. Empirical results show a long-term equilibrium relationship (co-integration) between the selected 5 Shariah indices. It shows also that the US-, European and the BRIC Sharia Indices are the leading markets compared to the Asian and Arabian Shariah Indices. The causality test show, that especially the Asian Sharia Index is strongly impacted by the other indices and less impacted by the Arabian Shariah Index.

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