Islamic stock index, conventional stock index and macroeconomic variables

This paper investigates the Granger-causal relationship between Dow Jones Islamic Market (DJIM), Dow Jones Industrial Average (DJIA), exchange rate, money supply, and CPI. The US is taken as a case study. The standard time series techniques are used for the analysis. The findings tend to indicate that the variables are theoretically related as evidenced in their cointegrating relationship and that the exchange rate is the most powerful determinant of stock market prices. This suggests that DJIM is very sensitive to the US currency fluctuations. Money supply and CPI are the other determinants of DJIM movements but to a lesser extent than the exchange rate. The findings have implications for the policy makers in that any changes in the macroeconomic variables have impact on the most important institution in the country which is stock market.