The causal relationship between the macroeconomic variables and the stock price: the case of Brazil

This study attempts to investigate the direction of causal relationship between the Brazilian stock market index (the Bovespa market index) and selected macro-economic indicators, namely interest rate, money supply (M2), and Brazilian Real exchange rate to the US dollar. A number of studies investigated the causal relationship between macro-economic indicators and stock market indices in the developed countries. But in the context of developing countries in South America such as Brazil, few studies can be traced in the literature. Thus, this study focuses on this issue by applying the standard time series techniques. The results of the study indicate that the variables under analysis are in fact cointegrated, which proves the existence of a long-term theoretical relationship among the variables. As regards the direction of causality, the results tend to indicate that the interest rate variable is the most exogenous (or leading) variable and the exchange rate is the most endogenous (or lagging) variable. These findings imply that the interest rate variable played a significant role in affecting the stock returns of the Bovespa Market Index and hence a special attention should be given to its management. Furthermore, strong evidence points to the relative exogeneity of the Bovespa Market Index, which means that the Brazilian stock returns can be used in predicting the endogenous macroeconomic indicators analyzed in this study

The impact of interest rate changes on islamic home financing: Malaysia as a case study

This paper investigated the impact of interest rate changes, specifically the base lending rate (BLR) on the demand for Islamic home financing in a dual banking system. Malaysia is taken as a case study. Theoretically, any increase in the interest rate (base lending rate), would lead customers who are guided by the profit motive to substitute Islamic home financing for conventional bank home loans and vice versa. Using a 109 monthly data series covering ten years, the study found that an increase in the base lending rate would trigger customers to obtain financing from Islamic banks. Conversely, any decrease in the base lending rate would induce customers to shift to the conventional home loans. The paper concludes that because customers are profit motivated, Islamic banks in the dual banking system, such as in Malaysia are exposed to interest rate risks despite operating on an interest free principle

The causal relationship between the macroeconomic variables and the stock price: the case of Brazil

This study attempts to investigate the direction of causal relationship between the Brazilian stock market index (the Bovespa market index) and selected macro-economic indicators, namely interest rate, money supply (M2), and Brazilian Real exchange rate to the US dollar. A number of studies investigated the causal relationship between macro-economic indicators and stock market indices in the developed countries. But in the context of developing countries in South America such as Brazil, few studies can be traced in the literature. Thus, this study focuses on this issue by applying the standard time series techniques. The results of the study indicate that the variables under analysis are in fact cointegrated, which proves the existence of a long-term theoretical relationship among the variables. As regards the direction of causality, the results tend to indicate that the interest rate variable is the most exogenous (or leading) variable and the exchange rate is the most endogenous (or lagging) variable. These findings imply that the interest rate variable played a significant role in affecting the stock returns of the Bovespa Market Index and hence a special attention should be given to its management. Furthermore, strong evidence points to the relative exogeneity of the Bovespa Market Index, which means that the Brazilian stock returns can be used in predicting the endogenous macroeconomic indicators analyzed in this study

The finance-growth nexus: is finance supply-leading or demand-following in islamic finance ? evidence from Malaysia

This paper attempts to investigate the Granger-causality between Islamic banks and economic growth. Malaysia is taken as a case study. The methodology adopted is the standard time series techniques. The results tend to suggest that Islamic bank financing leads growth and other variables, being the most exogenous compared to others. In other words, the finance is supply-leading rather than demand-following in the context of Islamic finance in Malaysia. Thus, this finding has clear policy implications for the government to keep on enhancing Islamic banks’ development leading to a positive economic growth

Identifying the lead-lag relationship between the shariah (islamic) equity index and macroeconomic variables: Malaysia as a case study

Islamic equity markets have been growing steadily particularly since the subprime crisis of 2007-2008 as an alternative investment outlet to the conventional equity markets. This paper makes an attempt to discern the factors that drive the Islamic stock markets. In particular, this paper investigates the lead-lag relationship between the Islamic equity index and macroeconomic variables. The standard time series techniques have been applied for the analysis. Malaysia is used as a case study. The findings tend to indicate that the Islamic equity index has been driven by the money supply(M2) and followed by the CPI, exchange rate and the industrial production. These findings have important policy implications for an emerging equity market such as Malaysia

Time-varying correlation between islamic stock indices: evidence from the GCC countries based on MGARCH-DCC approach

The paper makes an attempt to investigate the portfolio diversification opportunities available within the Islamic stock indices in the GCC countries. That requires the estimation of the time-varying variances of and covariances between the daily returns of the GCC Islamic stock indices. Hence the method used is the recent multivariate GARCH-DCC which takes care of their time-varying relationships. The findings tend to indicate that the unconditional volatility of the GCC stock returns are very low which may indicate that the reruns are stable and the risk is very low. However, the VaR estimator shows that the risk was rising dramatically since 2011, probably due to the political instability during this period. The time-varying conditional correlation between the stock returns of these countries appears to be low in general which provides an advantage to the investors interested in investing in the GCC financial markets. That means it provides more stable returns with low correlation between the stock returns and thus less risky. The results also indicate lower level of integration between the GCC stock markets

Does institutional stability granger-cause foreign direct investment? evidence from Canada

Global FDIs have increased substantially since the 1990’s. This was seen as a favorable development among developing countries, however developed countries have had a mixed reaction. In this paper we look at the effects of FDI flows on institutional stability, to better understand what drives FDI. The focus country for this paper is Canada, as it is one of the few countries where the economy remained relatively stable compared to other economies during the global financial crisis. As such, the findings from this study can shed light on what allowed Canadian policy makers to maintain economic stability. The methodology applied is Auto-Regressive Distributive Lag (ARDL) to understand the relationship between FDI and institutional stability along with other controlled variables (GNP, inflation, and exports). This study is different from others in that it examines the Canadian economy, and similar papers have examined different countries (to my knowledge). Based on previous theoretical and empirical literature, most of the research points to FDI positively affecting institutional stability. However, there is some literature that makes the case for this relationship not always holding true. Our empirical findings tend to show that it is in fact institutional stability that positively impacts FDI in the long run. As such, the policy makers should consider implementing policies that ensure that the strength of institutions is enhanced, and this in turn will attract more investment

Does the purchasing power parity theory hold for Malaysia ?

Originally propounded by the sixteenth-century scholars of the University of Salamanca, the concept of purchasing power parity (PPP) was revived in the interwar period in the context of the debate concerning the appropriate level at which to re-establish international exchange rate parities. Broadly accepted as a long-run equilibrium condition in the post-war period, it was first advocated as a short-run equilibrium by many international economists in the first few years following the breakdown of the Bretton Woods system in the early 1970s and then increasingly came under attack on both theoretical and empirical grounds from the late 1970s to the mid 1990s. This study is also embarking on the same quest to check for the purchasing power parity between Malaysia and US using a monthly data over 12 years. To look at the relation between Domestic Price in Malaysia, Foreign Price of the US and Exchange Rate between the Ringgit and the Dollar from these two nations, a standard time series technique was applied. Empirical results tend to indicate that there is a cointegrating relationship among exchange rates, Malaysia price level and US price level and that the PPP holds in that the three variables adjust to equilibrium in the long run. The implication for the policy makers is that the movement should have no effect on the relative competitive position of domestic or foreign firms, as competitiveness will depend on the real exchange rate

The effect of interest rates and rate of profit on islamic investment deposits: evidence from Malaysia

An inimitable attribute of Islamic banking, in theory, is its risk sharing paradigm. However, even after almost three decades from its inception, the vital stratagem of Islamic banking is still to replicate the products/services offered by conventional banks. This means that deposit rates should also be analogous in both the systems. The inference is that, though Islamic rates of return are based on interest free principles, but they are still interest based. The spectacular augmentation of Islamic banking may seem to be the upshot of Islamic resurgence worldwide; rather by its distinctive trait of profit and loss sharing. In order to scrutinize this conception, this study investigates whether Islamic investment deposits rely more on Islamic profit rates or on conventional interest rates offered by their counterparts. It analyzes the impact of these two rates on investment deposits in Malaysian Islamic banking system, by applying recent econometric techniques on monthly data. The paper discovers that, in defining the amount of deposits, neither Islamic profit nor interest rates play a momentous role. It may be assumed that, rather, other macro economic factors, in fact, explain the variations in Islamic investment deposits. However, the results tend to indicate that the profit rates are positively related to the amount of investment in Islamic banking system; while, a negative relation is found with the interest rates. This implies that the customers of Islamic banking system are indifferent of the Islamicity of their investments; and are driven by profit-motives. Hence, this situation exposes the Islamic banks to interest rate risk and displaced commercial risk

Economic determinants of islamic deposits: evidence from Malaysia

Customer deposits is one of a bank’s source of funds used to finance its banking and financing activities. This paper seeks to study the determinants that affect the level of deposits in Malaysia in particular saving deposits of Islamic banks. Bank deposits are a major form of savings. Whilst there have been many studies done on the various theories related to savings in Malaysia and worldwide, this study is going to investigate a simplistic model of the factors that influence savings in the form of a bank savings account. The standard time series techniques are used to discern the determinants of Islamic deposits. The variables identified for the investigation of this study are the Islamic Deposits, Gross Domestic Product (GDP), money supply, the Kuala Lumpur composite index (KLCI), rate of return of Islamic deposits, base lending rate and the inflation rate. The results of this study not only identify the theoretical cointegrating relationship between the economic variables and Islamic bank deposits but also evidence the possible relationship bank deposits has with some of the determinants in this study. The results indicate that the direction of causation between Islamic savings and GDP, money supply as well as the rate of return on Islamic deposit tends to be positive, whereas the effect of money supply is insignificant. It has been found that Islamic saving deposits is inversely related to a change in KLCI, base lending rate and the inflation rate. The findings of this study provide a useful insight into the effects of the identified economic variables on the level of Islamic deposits which may enable Islamic banks in Malaysia to take proactive measures in its asset liability management