Cointegration and Causality Tests of Islamic and Composite Indices in Malaysia
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Cointegration and Causality Tests of Islamic and Composite Indices in Malaysia

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    Cointegration and Causality Tests of Islamic and Composite Indices in Malaysia Cointegration and Causality Tests of Islamic and Composite Indices in Malaysia Presentation Transcript

    • Cointegration and Causality tests for Islamic and Composite Indices in Malaysia Author : Rininta Nurrachmi (www.rininta-nurrachmi.blogspot.com) Presenter : Marhamah Muthohharoh
    • Presented in Conference of Islamic Economics and Finance from Global Perspective International Islamic University Malaysia Saturday, 28 September 2013
    • Award First Runner Up for Best Paper
    • Rininta Nurrachmi (The Author) She held a Bachelor degree in Agriculture from Bogor Agricultural University (Indonesia) and a Master degree in Economics from International Islamic University Malaysia (IIUM). Before continue her study in IIUM, she has worked for Market Research Company in Jakarta - Indonesia as Quantitative Research Executives, Project Director and Field Administrator.
    • Marhamah Muthoharoh (The Presenter) She held a Bachelor degree in Agriculture from Bogor Agricultural University (Indonesia) and now pursuing her Master Degree in Economics at International Islamic University Malaysia (IIUM). Before continue her study in IIUM, she has worked as a Research Assistant in International Center for Applied Finance and Economics (InterCAFE) IPB, Bogor, Indonesia. And as a Non-civil Servant Staff of Macroeconomic Policy Department of State Ministry of National Development Planning Agency, Jakarta, Indonesia.
    • Introduction • Background 1. The composite index and shariah index have the same movement during the crisis. 2. Most of the previous papers, elaborate the objective during global crisis which end on 2010.
    • 0 200 400 600 800 1000 1200 1400 1600 1800 2000 0 2000 4000 6000 8000 10000 12000 14000 EMAS SI KLCI 0 2000 4000 6000 8000 10000 12000 14000 16000 0 200 400 600 800 1000 1200 1400 1600 1800 2000 KLCI HIJRAH 0 2000 4000 6000 8000 10000 12000 14000 16000 6/1/2007 6/1/2008 6/1/2009 6/1/2010 6/1/2011 6/1/2012 HIJRAH EMAS SI DATA MOVEMENT OF THREE INDICES
    • Research Objective To investigate the existence of cointegration and causal direction among FBM KLCI, FBM Hijrah Index and FBM Emas Shariah Index after Bursa Malaysia joint forces with FTSE group.
    • Literature Review The Relationship between Islamic and Composite indices Albaity and Ahmad (2008), Hengchao and Hamid (2011), Chapakia and Sanrego (2007) There is cointegration Hakim and Rashidian (2002); Beik and Wardhana (2011) There is absence of cointegration
    • Data and Methodology • Model 𝐿𝑛(𝐶) 𝑡= 𝛽0 + 𝛽1 𝐿𝑛(𝐻) 𝑡 + 𝛽2 𝐿𝑛(𝐸) 𝑡 + 𝜀𝑡 Ln(C) is natural logarithm for FBM KLCI, measured in local currency Ln(H) is natural logarithm stock prices in FBM Hijrah Index measured in local currency Ln(E) is natural logarithm stock closing prices in FBM EmasShariah Index measured in local currency.
    • Data and Methodology • Data Duration of data : 1 June 2007 - 31 May 2013 Total sample size : 1479 Source of data : Bloomberg • Methodology 1. VAR 2. Unit root test : ADF, PP, KPSS 3. Cointegration test : Julius – Johansen Cointegration 4. Causality direction : short-run granger causality test
    • Result and Discussion • The existence of unit root  Stationary at I(I) • The absence of cointegration or no long-run relationship in the variables. It indicates that the market is efficient and the error of one series cannot predict the movement of other indices
    • Unit Root Test Result Augmented Dickey Fuller (ADF) Test Variables Constant Trend Level First- Difference Conclusion Level First-Difference Conclusion Ln(Composite) -0.475327 -20.70258*** I(1) -0.475327 -20.7537*** I(1) Ln(Hijrah) -0.517702 -34.30003*** I(1) -1.570715 -34.32191*** I(1) Ln(Emas) -0.450988 -33.99737*** I(1) -1.687256 -34.03908*** I(1) Philip-Perron (PP) Test Variables Constant Trend Level First- Difference Conclusion Level First-Difference Conclusion Ln(Composite) -0.428678 -34.43981*** I(1) -1.825535 -34.44221*** I(1) Ln(Hijrah) -0.485319 -34.27527*** I(1) -1.543376 -34.29369*** I(1) Ln(Emas) -0.485048 -34.08719*** I(1) -1.688878 -34.11343*** I(1) Kwiatkowski-Phillips-Schmidt-Shin (KKPSS) Test Variables Constant Trend Level First- Difference Conclusion Level First-Difference Conclusion Ln(Composite) 2.734449*** 0.307862 I(0) 0.490875*** 0.131435 I(0) Ln(Hijrah) 2.377878*** 0.223554 I(0) 0.524364*** 0.080542 I(0) Ln(Emas) 2.387278*** 0.29573 I(0) 0.525625*** 0.10107 I(0)
    • Cointegration Test Result Null Hypothesis Trace Max Eigenvalue Cointegration Rank Critical Value (5%) Cointegration Rank Critical Value (5%) r = 0 24.01333 29.79707 18.27561 21.13162 r <= 1 5.737722 15.49471 4.490307 14.2646 r <= 2 1.247415 3.841466 1.247415 3.841466 Note: The lag order specified is 1 based on Akaike Information Criteria (AIC).
    • Causal Direction Null Hypothesis F-Statistic P-Value Conclusion (Hypothesis) LNKLCI does not Granger Cause LNHIJRAH 2.04869 0.0853 Rejected LNHIJRAH does not Granger Cause LNKLCI 1.14664 0.3329 Accepted LNEMAS does not Granger Cause LNHIJRAH 2.4534 0.0442 Rejected LNHIJRAH does not Granger Cause LNEMAS 1.04118 0.3846 Accepted LNEMAS does not Granger Cause LNKLCI 1.79984 0.1263 Accepted LNKLCI does not Granger Cause LNEMAS 1.94222 0.101 Accepted FBM Hijrah Index FBM KLCI FBM Emas Shariah Index
    • Conclusion • The cointegration does not exist among the three variables. • Unidirectional causality occurred between FBM KLCI towards FBM Hijrah index and between FBM Emas Shariah index towards Hijrah index. • The decline of Shariah index due to crisis in global and domestic was a short-run relationship and it only occurred because of the shock from in FBM KLCI. • Investing in Shariah compliant securities have attracted local and foreign investors.