Causal Relationship between Macro-Economic Variables & Islamic Stock

1. Causal Relationship
between Macro-Economic
Variables & Islamic Stock
Market of UK
MOHSIN ALI, MUDEER KHATTAK, MUHAMMAD UMAR ISLAM

2. Introduction
Financial Crisis
Islamic Finance Growth
Objectives
◦ Study the relationship between macroeconomic variables and Islamic stock markets.
◦ Determine the direction of causality.
◦ Policy implication of derived results.
◦ Perform system wide shock and observe horizon to equilibrium

3. Literature Review
Hakim and Rashidian (2005)
Majid and Rosylin (2017)
UK stock market
Gap

4. Data and Methodology
Quarterly data (1997 onwards) have been obtained from data stream for the following variables:
◦ GDP
◦ Exchange rate
◦ Interest rate
◦ CPI
◦ Dow Jones Islamic Stock Market UK
ARDL, VECM, IRF and PP

5. Results and Discussion

6. ADF Test
Variable Test Statistics Critical Value Implication
LEVEL FORM
LDJIUK -2.3956 -3.4849 Non-Stationary
LEXCRATE -2.2697 -3.4849 Non-Stationary
LCPI -2.3877 -3.4849 Non-Stationary
LINTRATE -1.4949 -3.4849 Non-Stationary
LGDP -.99445 -3.4849 Non-Stationary
DIFFERENCED FORM
DDJIUK -4.9313 -2.9109 Stationary
DEXCRATE -6.3188 -2.9109 Stationary
DCPI -6.5479 -2.9109 Stationary
DINTRATE -3.4730 -2.9109 Stationary
DGDP -3.0163 -2.9109 Stationary

7. Johansen COINTEGRATION TEST:
MAXIMUM EIGEN VALUE STATISITCS
******************************************************************************
Null Alternative Statistic 95% Critical Value 90%Critical Value
r = 0 r = 1 37.1711 37.8600 35.0400
r<= 1 r = 2 26.3787 31.7900 29.1300
TRACE STATISITCS
Null Alternative Statistic 95% Critical Value 90%Critical Value
r = 0 r>= 1 92.1586 87.1700 82.8800
r<= 1 r>= 2 56.9876 63.0000 59.1600

8. ARDLApproach:
Joint test of zero restrictions on the coefficients of additional variables:
Lagrange Multiplier Statistic CHSQ( 5)= 11.4948[.042]
Likelihood Ratio Statistic CHSQ( 5)= 12.7366[.026]
F Statistic F( 5, 43)= 1.9969[.098]
ecm = LEXCRATE -.10592*LDJIUK + .011937*LCPI + .15458*LINTRATE + .1644
4*LGDP -1.1467*CONS + .0047480*TIME
*******************************************************************************
R-Squared .57571 R-Bar-Squared .50228
S.E. of Regression .034209 F-stat. F( 8, 53) 8.8199[.000]
Mean of Dependent Variable -.3831E-3 S.D. of Dependent Variable .048490
Residual Sum of Squares .060855 Equation Log-likelihood 126.7442
Akaike Info. Criterion 116.7442 Schwarz Bayesian Criterion 106.1085
DW-statistic 1.7987
*******************************************************************************

9. Results from VECM
Variable DJIUK EXCRATE GDP INTRATE CPI
dLDJIUK1 1.0137[.316
]
.25269[.802
]
.59811[.238] .62419[.535] 1.2224[.227]
dLEXCRATE1 .58112[.564
]
.38312[.703
]
.86122[.393] .37300[.711] 2.8562[.006]
dLGDP1 .27758[.782
]
.27969[.781
]
.31972[.750] 3.7038[.001] .21042[.236]
dINTRATE1 2.2603[.028
]
3.0517[.004
]
2.0200[.049] 4.8195[.000] 1.5643[.124]
dCPI1 1.5451[.129
]
1.8632[.068
]
.44676[.657] .33347[.740] 2.1288[.038]
ecm1(-1) 1.0818[.284
]
.98590[.329
]
1.0845[.283] 4.6222[.000] 2.3949[.020]
Implicatio
n
Exogenous Exogenous Exogenous Endogenous Endogenous
DIAGNOSTIC TESTS
CHI-SQ SC-1 .57986[.446
]
.10082[.751
]
10.6019[.000
]
.023325[.879
]
.044955[.832
]
CHI-SQ FF-1 2.2779[.131
]
4.2527[.039
]
12.2421[.000
]
12.9357[.000
]
.43773
[.508]
CHI-SQ N-1 7.2302[.027
]
8.8105[.012
]
1.9307
[.381]
100.89
[.000]
3.3695
[.185]
CHI-SQ HET-1 .09475[.758
]
8.7926[.003
]
.57768
[.447]
15.1423[.000
]
.98174
[.322]
 t-ratios with p-values in parenthesis

10. Variance Decomposition
Forecast Horizon - 12 (3 years)
VARIABLES DJIUK EXCRATE GDP INTRATE CPI
DJIUK 73.15% 0.521% 14.64% 4.82% 6.85%
EXCRATE 6.31% 67.14% 20.42% 4.01% 2.09%
GDP 4.02% 3.30% 89.53% 1.29% 1.83%
INTRATE 20.11% 10.15% 50.69% 13.15% 5.88%
CPI 3.67% 14.98% 2.81% 23.81% 55.71%
Forecast Horizon - 24
VARIABLES DJIUK EXCRATE GDP INTRATE CPI
DJIUK 74.10% 0.291% 14.59% 4.84% 6.15%
EXCRATE 6.13% 68.84% 20.45% 3.34% 1.21%
GDP 4.09% 3.22% 90.58% 0.71% 1.37%
INTRATE 20.92% 10.75% 52.60% 9.71% 6.01%
CPI 3.97% 15.178% 2.48% 25.90% 52.46%

11. Impulse Response Function

13. Conclusion
- GDP is found to be the strongest variable affecting other variables followed by interest rate to
be the weakest.
- Interest rates are found to be the weakest variable most probably due to capital structure
component of Islamic stocks and components of Dow Jones Islamic.
- Implications