This paper aims to study the relationship between local and foreign macroeconomic variables and Malaysia available Shariah Indices. In our study, we used the Vector Error Correction (VEC) framework by initially looking at the long run and short run relationship between Malaysia available Shariah indices (i.e. KLSI, FTSE Bursa Malaysia EMAS Shariah Index and FTSE Bursa Malaysia Hijrah Shariah Index) and the macroeconomic variables via the Johansen cointegration technique. Monthly data during the twenty two-year period (from January 1990 to December 2011) has been collected from DataStream and tested. The findings show positive relationship between the variables from 1990 to 2006. However, mix results were found after the period till 2011. This study then conclude that the standardized set of macroeconomic variables that specified by earlier researchers still can be relied but in careful policy formulation.

1. By:
Norshamshina Mat Isa
Zunairah Hassan
Azrul Abdullah
Accounting Research Institute, Faculty of Accountancy, and Faculty of Business Management UiTM
Perlis.
Relationship between macroeconomic variables
and Malaysia available Shariah Indices

2. INTRODUCTION
 Association between market and economic activities
is quite observable regardless of its causality
direction by many investors.
 A standardized set of macroeconomic variables is
still not conclusive.
 Previous studies shows that, macroeconomic
variables selected to examine the determinants of
stock market tend to differ.
 Does the standardized set of macroeconomic
variables that specified by previous researcher can
still be relied?

3. Introduction (CONT)
 Studying the interaction of macroeconomic variables
and the Malaysian Shariah Index is our primary
interest because of three reasons;
 Investment in Shariah equities are acceptable
investments for all Muslim and non-Muslim investors.
 Malaysia pursues a trade-led approach to stimulate its
economy.
 Unlike developed countries, Malaysia does not adopt a
freely exchange rate system and has more capital
control (Pan et al., 2007).

4. Objectives
1. To investigate the long and short run relationship of
macroeconomic variables and the Shariah Index.
2. To examine the Granger causal relationship among
few chosen macroeconomic variables and the
selected Malaysia Shariah indices.

5. Methodology
Data
 The monthly data for macroeconomic variables and
indices were obtained from the DataStream.
 Selected macroeconomic variables; Consumer Price
Index (CPI), Real Effective Exchange Rate (EX),
Treasury bill rate (TBR), Industrial Production Index
(IPI), Money Supply (M3), and US Federal Fund Rate
 Islamic equity market indices; KLSE Shariah Index
(KLSI) (period of 1990 to 2006), and FTSE Bursa
Malaysia EMAS Shariah Index (period of 2007 to
2011).

6.  In exploring the relationship between the Malaysian Islamic
equity market and macroeconomic variables, we take into
consideration the following model:
ln MSIt = a + b ln CPIt + c ln EXt + d lnTREt + e ln IPIt + f ln M3t + g ln USFRt + εt

7. Methodology
 This study employed the Augmented Dickey Fuller (ADF) (1988)
and Phillips-Perron (PP) (1988) test to examine stationarity in
financial time series data. (i.e. The present of unit root)
 Next; Johansen test (1988) is employed once the study had
determined the order of integration of each series.
 If cointegration is found during cointegration test, Vector Error-
Correction Model (VECM) of Granger causality will be used.
 On the other hand, if no cointegration is found, the analyses
will then be based on the regression of the first difference (1) of
the variables using a standard VAR model.
 Causal relationship; The Granger causality is employed.

8. Findings
 Unit Root Test Results
 The conclusion of ADF test and Phillip-Perron test
results for all series (with 95% confidence interval).
The majority of the series can be concluded as non-
stationary.
 Estimation Results
 Johansen Co integration Test
 This study found that at least two cointegrating vectors
during 1990-2006 (KLSI) and at least four cointegrating
vectors after the periods (FTBMEMS).

9. The co integration relationship can be re-expressed as:
LKLSIt = 248.03LCPIt + 219.56LEXt + 3.79LIPIt +15.58LM3t+2.54LTBRt + 1.49LUSFRt
LFTBMEMSt = -15.81LCPIt – 6.68LEXt + 0.87LIPIt + 5.67LM3t – 1.18LTBRt – 0.02LUSFRt
1. (1990-2006)
2. (2007-2011)

10. Findings (CONT)
 Vector Error Correction Model Test Results
Inflation impact of inflation on the KLSI is negative and
insignificant However the impact is positive and
significant after the period of 2006.
Money
supply
Shows a negative significant impact on the
Malaysian Shariah indices
Exchange
rate
Shows negative and significance for the whole
period (1990 to 2011).
Industrial
production
positive but only significant after the period of
2006
Interest Rate has a negative significant impact during 1990 to
2006 while after the period is positive and
significant

11. Findings
 Granger Causality Test Results
 Overall results show all the variables have
unidirectional short run causal effect during the
study period.
Period Results finding
(1990-2006) • Unidirectional short-run causal effects running
from inflation and money supply to index
• Inflation also is seen to Granger cause industrial
production in the whole period of study
(2007-2011) • Inflation Granger caused TBR
• US monetary policy statistically significant to
Granger cause industrial production, money
supply and Malaysian interest rate

12. Conclusion
 Our study is to examine the association of
macroeconomic variables and the Shariah equity
market.
 We believed that our finding can lead local and foreign
investors for a better short and long-term investment decision-
making.
 Useful benchmark to investors who seek to invest in Malaysia
Shariah equity markets.
 Findings of this paper also demonstrate some
variables having similar result to other researchers
and some not having based on the study period.
 The standardized set of macroeconomic variables that
specified by previous researchers still can be relied but in
careful formulation of strategy and policy.

13. THANK YOU