The relationship between oil price, exchange rate and Islamic stock market in Malaysia

Abstract

This research discusses the relationship between oil price, macroeconomic variables and Islamic stock market in Malaysia. The objective of this research is to analyze the dynamic effects of oil price and macroeconomic variables changes on Islamic stock market in Malaysia using an estimation of Vector Auto Regression (VAR) method. The variables involved in this research are Crude Oil Price (COP), Foreign exchange rates of Ringgit Malaysia - United States Dollar (MYR) and FTSE Bursa Malaysia Emas Shariah Index (FBMES). Using monthly data over the period January 2007 - December 2011, the study applies the co-integration analysis, multivariate Granger causality test, Impulse Response Function (IRF) and Variance Decomposition (VDC) analysis. The findings showed that Islamic stock prices are co-integrated with oil price and exchange rate variables. Based on cointegration relationship analysis, the Islamic stock price is positively and significantly related to the oil price variable but inversely and not significantly related to the exchange rate variable. Using Granger causality test, only oil price variable is Granger-caused by the Islamic stock return in Malaysia. Therefore, oil price shock will affect the Islamic stock return in the short and long run in Malaysia.