Is there any causal link between shariah index and islamic unit trust growth ? Malaysian evidence

Farid, Hazim and Masih, Mansur (2018): Is there any causal link between shariah index and islamic unit trust growth ? Malaysian evidence.

Abstract

Islamic-based unit trust fund has been growing exponentially since 2007 and is believed as the main agent of stabilizer for FTSE Bursa Malaysia EMAS Shariah Index since then. This paper investigates the relationship between Islamic unit trust’s net asset value (NAV) growth as the focus variable and FTSE Bursa Malaysia EMAS Shariah Index (FTFBMS )along with other control variables such as, Brent oil, USD/MYR exchange and inflation rate. Revealing the relationship will give us the right steps to build a stable Shariah index. We employed the Auto Regressive Distributed Lags (ARDL) or ‘Bounds Test’ to find cointegration, and Variance Decomposition (VDC) to discover exogeneity and endogeneity among the variables. Malaysia is used as a case study. The Variance Decomposition shows that inflation leads changes followed by USD/MYR exchange rate with Islamic unit trust being the most endogenous or lagging. There are significant relationships between the variables in the long run with a strong causal link between FTSE Bursa Malaysia EMAS Shariah Index and Islamic unit trust funds growth where the latter is affected mostly by the former. The results have strong policy implications.

• Item Type: MPRA Paper
• Language: English
• Keywords: EMAS Shariah index, Unit trust, ARDL, VDC, Malaysia
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; 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

References

Arouri, M. E. and Hand Julien, F.,( 2009), On the Short-term Influence of Oil Price Changes on Stock Markets in GCC Countries: Linear and Nonlinear Analyses. Economics Bulletin, 29(2),795-804.

Boudoukh, J.and Richardson, M., (1993), Stock Returns and Inflation: A Long-horizon Perspective. American Economic Review, 83(5),1346-1355.

Caporale, T.and Jung, C., (1997). Inflation and Real Stock Prices. Applied Financial Economics, 7, 265-266.

Choudhry, T., (2001). Inflation and Rates of Return on Stock: Evidence from High Inflation Countries. Journal of International Financial Markets, Institutions and Money, 11, 75-96.

Chu, P. K. K. (2010). The Price Linkages between the Equity Fund Price Levels and the Stock Markets: Evidences from Cointegration Approach and Causality Analysis of Hong Kong Mandatory Provident Fund (MPFs). International Review of Financial Analysis, 19, 281-288.

Fama, E. F.and Schwert, G. W., (1997), Asset Returns and Inflation. Journal of Financial Economics, 5, 115-146.

Hondroyiannis, G., and Papapetrou, E. (2006). Stock Returns and Inflation in Greece: A Markov Switching Approach. Review of Financial Studies, 15, 76-94.

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

Hussin, M. Y., Fidlizan, M., A. Razak, A., Gan, P. T.and Marwan, N., (2013). The Link Between Gold Price, Oil Price and Islamic Stock Market: Experience from Malaysia. Journal of Studies in Social Sciences. 4(2), 161-182.

Ibrahim, M. H., (1999). Macroeconomic Variables and Stock Prices in Malaysia: An Empirical Analysis. Asian Economic Journal,, 13(2), 219 – 231.

Ibrahim, H. M., (2001). Macroeconomic Variables, Exchange Rate and Stock Price: A Malaysian Perspective. IIUM Journal of Economics and Management, 9(2), 141-163.

Ivanov, Ventzislav.and Kilian, Lutz. (2005). Studies in Nonlinear Dynamics & Econometrics. 9(1), 1 -36.

Johansen, S. and K. Juselius. (1990). Maximum Likelihood Estimation and Inference on Cointegration with Applications to Demand for Money. Oxford Bulletin of Economics and Statistics, 52, 169-210.

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

Low, Soo‐Wah.and Ghazali, Noor Azlan. (2007). The Price Linkages between Malaysian Unit Trust Funds and the Stock Market: Short Run and Long Run Interrelationships. Managerial Finance, 33(2), 89-101

Mirza Vejzagic and Hashem Zarafat., (2013). Relationship between Macroeconomic Variables and Stock Market Index: Co-Integration Evidence from FTSE Bursa Malaysia Hijrah Shariah Index. Asian Journal of Management Sciences & Education. 2(4),. 94 – 108.

Nair, K. and Ratheesh. (2014). Indian Mutual Fund Market – A Tool to Stabilize Indian Economy. International Journal of Scientific and Research Publications, 4(11), 1 -8.

Naseri, M. and Masih, M., (2013). Causality between Malaysian Islamic Stock Market and Macroeconomic Variables. MPRA Paper No. 60247.

Pesaran, M.H., Shin, Y., and Smith, R.J. (2001). Bounds Testing Approaches to the Analysis of Level Relationships. Journal of Applied Econometrics, 16 (3), 289-326.

Raddatz, Claudio.and L. Sergio. (2011). On the International Transmission of Shocks: Micro-Evidence from Mutual Fund Portfolios. W17358. NBER Working Paper Series.

Sadorsky, P. (1999). Oil Price Shocks and Stock Market Activity. Energy Economics. 21, 449-469.

Wong, Bangpo., P. and Sharma, S. C., (2002). Stock Market and Macroeconomic Fundamental Dynamic Interactions: ASEAN-5 countries. Journal of Asian Economics, 13(1), 27-51.

Yangbo, B., Wickramanayake, J., Watson, J..and Tsigos, S. (2010). The Relationship between Mutual Fund Flows and Stock Market Returns: A Comparative Empirical Analysis. Corporate Ownership & Control. 8(1),785 -799.