Relationship between Macroeconomic Variables and Malaysia Available Shariah Indices

Abstract

This paper aims to study on the association between selected macroeconomic variables and Malaysia Shariah Indices. In our study, we used the Vector Error Correction framework by looking at the long run and short run relationship between macroeconomic variables and (i) Kuala Lumpur Shariah Index (1990-2006), and (ii) FTSE Bursa Malaysia EMAS Shariah Index (2007-2011). Monthly data during the twenty one-year period between 1990 and 2011 are collected and tested. In the long run, the impacts of all selected variables on Kuala Lumpur Shariah index for the period of 1990 to 2006 are positive. However, the effect of increases in consumer price index, exchange rate, Treasury Bill and US Federal Fund Rate on Malaysian Shariah index after the period till 2011 are negative. Besides, this study found positive relationship only in industrial production and money supply for the period of 2007 to 2011. In the short run, mix results were found during 1990 to 2011. The result also shows in overall the variables have unidirectional short run causal effect during the study period. This study then conclude that the standardized set of macroeconomic variables that specified by previous researchers still can be relied but in careful strategy formulation.

Keywords: Granger Causality, KLSI, FTSE EMAS Shariah Index, Macroeconomic Variable, Investment, Stock Market