Impact of macroeconomic variables on shariah stock markets: evidence from Malaysia based on ARDL approach

The Financial crises have destabilized the economy and have impacted the lives of millions of people across the world. The Financial crises have shown that Islamic capital market may be immune to crises. This has increased the demand for Islamic capital products. The increasing popularity of Islamic capital market from Muslim Investors and Non-Muslim investors has expanded Islamic capital market across the globe. However, the literature on Islamic Shariah capital market products are thin. Literature on capital market of emerging market is also thin. Therefore, this paper attempts to fill the gap in the literature by examining Islamic Shariah capital market link with macroeconomic variables for an emerging market. The paper attempts to investigate whether Islamic Shariah products provide stability for the financial system. The paper examines this by examining long-term cointegrating relationship between Shariah Index and four selected macroeconomic variables. The standard time series techniques are used and Malaysia is used as a case study. The result of ARDL model shows that Sharia Index and four selected macroeconomic variables; Money Supply, Exchange Rate, Oil Price and Interest rate have a long term cointegrating relationship. The Result of ECM shows that Oil price and interest rate have long-term relationship between sharia indexes in Malaysia. The result of VDC shows that Money Supply and Oil price are the driving forces of Shariah Index in Malaysia. These results show that Islamic capital market is also not immune to the financial crises. However, the risk and return principles embodied in Islamic financial products give stability to the economy. The result of this research shows that policy makers can predict the direction of the economy from Shariah Index in Malaysia