The links between crude palm oil, conventional and Islamic stock markets: evidence from Malaysia based on continuous and discrete wavelet analysis

Razak, Razman and Masih, Mansur (2017): The links between crude palm oil, conventional and Islamic stock markets: evidence from Malaysia based on continuous and discrete wavelet analysis.

Abstract

The palm oil industry is crucial to the Malaysian economy. It is also becoming more relevant and important globally and plays a key role in the expansion of Islamic Finance. Hence, this study aims to ascertain the relationship between crude palm oil prices (CPO) and the stock market (both conventional and Islamic). This study has selected Malaysia as a case study for its reliance on the palm oil industry as well as its position in Islamic Finance. Furthermore, the potential inclusion of the palm oil industry into investment portfolios also warrants the analysis of the co-movement between crude palm oil and stock market indices over varying investment horizons or time scales. Thus, to accomplish this, the Continuous Wavelet Transformation (CWT) and Maximum Overlap Discrete Wavelet Transformation (MODWT) methods were employed. The results tend to indicate that there exists little relation between CPO price returns and both the Conventional and Islamic stock market returns in the short and medium term. Interestingly enough, in the long term, significant co-movement between the variables start to emerge. This is a compelling finding as it provides new information for the investors to diversify their portfolio and time their investments. The result of this study is also a significant contribution to the pool of knowledge which lacks prominent literature on the link between palm oil, the conventional and Islamic stock markets.

• Item Type: MPRA Paper
• Language: English
• Keywords: crude palm oil prices, EMAS Shariah, KLCI, Malaysia, Wavelet
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

References

Abdullah, A. M., Saiti, B., & Masih, M. (2016). The Impact of Crude Oil Price On Islamic Stock Indices of South East Asian Countries: Evidence from MGARCH-DCC and Wavelet Approaches, Borsa Istanbul Review, 16(4), 219 -232.

Bjornland, C. H. (2009). Oil Price Shocks and Stock Market Booms in an Oil Exporting Country. Scottish Journal of Political Economy, 2(5), 232-254.

Boyer, M. M., & Filion, D. (2007). Common and Fundamental Factors in Stock Returns of Canadian Oil and Gas Companies. Energy Economics, 29, 428-453.

Chen, N. F., Roll, R., & Roll, S. A. (1986). Economic Forces and The Stock Market. Journal of Business, 59, 383-403.

Gallegati, M. (2008). Wavelet Analysis of Stock Returns and Aggregate Economic Activity. Computational Statistics & Data Analysis, 6(52), 3061-3074.

Gencay, R. F., & Selcuk. (2001). Differentiating Intraday Seasonalities through Wavelet Multi-Scaling. Physica A: Statistical Mechanics and Its Applications, 3(289), 543-556.

Gorton, G., & Rouwenhorst, K. G. (2006). Facts and Fantasies About Commodity Futures. Financial Analyst Journal, 62, 47-68.

Huang, R., Masulis, R., & Stoll, H. (1996). Energy Stocks and Financial Markets. Journal of Futures Markets, 16, 1-27.

Jimenez-Rodriguez, R. (2009). Oil Price Shocks and Real GDP Growth: Testing for Nonlinearity. Energy Journal, 30(1), 1-24.

Jones, C., & Kaul, G. (1996). Oil and The Stock Markets. Journal of Finance, 51, 463-491.

Khatun, R., Hasan Reza, M. I., Moniruzzaman, M., & Yaakob, Z. (2017). Sustainable Oil Palm Industry: The Possibilities. Renewable and Sustainable Energy Reviews, 76, 608-619.

Kilian, L., & Park, C. (2009). The Impact of Oil Price Shock on the U.S. Stock Market. International Economic Review, 50, 267-1287.

Kling, J. L. (1985). Oil Price Shocks and Stock-Market Behaviour. Journal of Portfolio Management, 12, 34-39.

Miller, J. I., & Ratti, R. A. (2009). Crude Oil and Stock Markets: Stability, Instability and Bubbles. Energy Economics, 31, 559-568.

Narayan, P. K., & Sharma, S. S. (2011). New Evidence on Oil Price and Firm Returns. Journal of Banking and Finance, 35, 3253-3262.

Percival, D. P. (1995). On Estimation of the Wavelet Variance. Biometrika, 3(82), 619-631.

Sadorsky, P. (2001). Risk Factors in Stock Returns of Canadian Oil and Gas Companies. Energy Economics, 23, 17-28.

Wang, Y., Wu, C., & Yang, L. (2013). Oil Price Shocks and Stock Market Activities: Evidence From Oil-Importing and Oil-Exporting Countries. Journal of Comparative Economics, 41, 1220-1239.

Whitcher, B. & Guttorp, P. (2000). Wavelet Analysis of Covariance with Application to Atmospheric Time Series. Journal of Geophysical Research: Atmospheres, 101, 14941-14962.

Zhu, H. M., Li, S. F., & Yu, K. (2011). Crude Oil Shocks and Stock Markets: A Panel Threshold Cointegration Approach. Energy Economics, 33, 987-994.