• Mohd Yahya Mohd Hussin Universiti Pendidikan Sultan Idris
  • Fidlizan Muhammad Universiti Pendidikan Sultan Idris
  • Salwah Amirah Awang Polytechnic of Sultan Azlan Shah
  • Mohd Faisol Ibrahim Universiti Sains Islam Malaysia
Keywords: Cointegration, Vector error correction model (VECM), Islamic stock market, Macroeconomic variables


This research will focus on the relationship between the development of stock market and macroeconomic variables in Malaysia. Generally, the purpose of this research is to observe this relationship in the Malaysian context. In order to achieve the objective, Vector Auto Regression (VAR) estimation method was applied on the created research model. The variables involved in this research were the FBM Emas Shariah index (FBMES) used as proxy for Islamic stock market, FBM Kuala Lumpur Composite Index (FBMKLCI) used as proxy for conventional stock market, Industrial Production Index (IPI), Consumer Production Index (CPI), Aggregate Money Supply (M3), Islamic Inter Bank Rate (IIR), Treasury Bill Rate (TBR) and Exchange Rate of Malaysian Ringgit-United States Dollar. This research utilised monthly data from January 2007 to December 2011 taken from authorized sources. The findings showed that stock prices in Malaysia (Islamic and conventional) are co-integrated with the selected macroeconomic variables in which the stock prices is related positively and significantly with IPI and CPI variables but related negatively and significantly with M3, IIR, TBR and MYR variables. From the aspect of Granger causal relationship, it is found that variables of IPI and IIR are the Granger cause for FBMES in the short term. On the other hand, no variables can be proved as granger cause for FBMKLCI.


Download data is not yet available.


Abdullah, D. A. & Hayworth, S. C. (1993), “Macroeconometrics of Stock Price Fluctuations”, Quarterly Journal of Business and Economics, Vol. 32 No. 1, pp. 49-63.

Abdul Rahman, A., Mohd Sidek, N. Z., and Tafri, F. H. (2009), “Macroeconomic Determinant of Malaysian Stock Market”, African Journal of BusinessManagement, Vol. 3, No. 3, pp. 96-106.

Ajayi, R. A. & Mougoue, M. (1996), “On The Dynamic Relation Between Stock Prices and Exchange Rates”, Journal of Financial Research, Vol. 19 No. 2, pp. 193-207.

Akash, R. S, Hasan, A, Javid, M. T, Ali Shah, S. Z and Khan, M. I, (2011), “Co-integration and causality analysis of dynamic linkage between economic forces and equity market: An empirical study of stock returns (KSE) and macroeconomic variables (money supply,inflation, interest rate, exchange rate, industrial production and reserves)”, African Journal of Business Management, Vol. 5 No. 27, pp. 10940-10964

Aljafari, M. K., Salameh, R. M., and Habbash, M. R. (2011), “Investigating the relationship between Stock market and macroeconomic variables: Evidence from Developed and Emerging markets”, International Research journal of Finance and Economics, Vol 17, pp. 6-30

Bacha, O.I. (2002), “New Issues in Islamic Capital Market Development: Risk Management And Islamic Capital Markets”, Islamic Capital Markets Conference, Securities Commission, March 2002, Kuala Lumpur, Malaysia.

Bulmash, S and Trivoli, G. (1991), “Time-Lagged Interaction Between Stock Prices and Selected Economic Variables”, Journal of Portfolio Management, Vol. 17 No. 4, pp. 61-67.

Chen, N. R., Roll, R. and Ross, S. A. (1986), “ Economic Forces and The Stock Market”,

Cheung, Y.W and Lai, K. (1993), “A Fractional Cointegration Analysis of Purchasing Power Parity”, Journal of Business & Economic Statistics, Vol. 11, pp. 103-112.

Christoper Gan, Minsoo Lee, Hua Hwa Au Yong and Jun Zhang (2006), “Macroeconomic Variables and Stock Market Interactions: New Zealand Evidence”, Investment Management and Financial Innovations, Vol. 3 No. 4, pp. 89-101.

Coleman AK, Kwame F,Tettey A (2008). Impact of macroeconomic indicators on stock market performance. The case of the Ghana Stock Exchange. J. Risk Financ., 9(4): 365-378

DeFina, R.PP., (1991), “Does Inflation Depress the Stock Market?”, Business Review-Federal Reserve Bank of Philadelphia, Nov/Dec.

Dhakal, D., Kandil, M. And Sharma, S. C. (1993), “Causality Between the Money Supply and Share Prices: a VAR Investigation”, Quarterly Journal of Business and Economics, Vol. 32 Bil 3, pp. 52-74.

Elton, E.J. and M. Gruber. (1991), Modern Portfolio Theory and Investment Analysis, Fourth Edition, New York: John Wiley & Sons.

Fama E. F. (1990), “Stock Returns, Expected Returns and Real Activity”, Journal of Finance, Vol. 45 No. 4, pp. 545-565.

Fama, E. F. (1981), “Stock Returns, Real Activity, Inflation and Money”, American Economic Review, Vol. 71, pp. 545-565.

Fama, E. F. (1986). “Term premiums and default premiums in money markets”. Journal of Financial Economics, Vol. 17, p. 175-196.

Fama, E.F. & Schwert, G.W., (1977), “Asset Returns and Inflation”, Journal of financial Economics, Vol. 5, pp. 115-146.

Geske, R. and Roll, R. (1983), “ The Monetary and Fiscal Linkage Between Stock Returns and Inflation”, Journal of Finance, Vol. 38, pp. 1-33.

Harris, R.I.D. (1995), Using Cointegration Analysis in Econometric Modelling, United States: Prentice Hall.

Hsing, Y. (2011). “The Stock Market and Macroeconomic Variables in a BRICS Country and Policy Implications”. International Journal of Economics and Financial Issues, Vol. 1 No.1, pp. 12-18.

Ibrahim, M and Aziz, PP. (2003), “Macroeconomic Variables and the Malaysian Equity Market: a View Through Rolling Subsamples”, Journal of Economic Studies, Vol. 30 No. 1, pp. 6-27.

Ibrahim, M and Wan, S.W.Y (2001), “Macroeconomic Variables, Exchange Rate and Stock Price: A Malaysian Perspective”, IIUM Journal of Economics and Management, Vol. 9 No. 2, pp. 141-163.

Ibrahim, M. (1999), “Macroeconomic Variables and Stock Prices in Malaysia: An Empirical Analysis”, Asian Economic Journal, Vol. 13 No. 2, pp. 219-231.

Ibrahim, M. (2003), “Macroeconomic Forces and Capital Market Integration: A VAR Analysis for Malaysia”, Journal of the Asia Pacific Economy, Vol. 8, pp. 19-40.

Johansen, S (1988), “Statistical Analysis of Cointegration Vectors”, Journal of Economic Dynamic Control, Vol. 12, pp. 231-254.

Johansen, S and K. Juselius (1990), “Maximum Likelihood Estimation and Inferences on Cointegration With Application to The Demand For Money”, Oxford Bulletin of Economics and Statistics, Vol. 52, pp. 169-210. Journal of Business, Vol. 59 No. 3, pp. 383-403.

Kearney, C. and Daly, K. (1998). “The Causes of Stock Market Volatility in Australia”. Applied Financial Economics, Vol.8, pp. 597-605.

Khil, J. & Lee, B.S. (2000), “Are comman stocks a good hedge against inflation? Evidence from the Pasific-rim countries” Pasific-Basin Finance Journal. Vol. 8 No. 3-4, pp. 457-482.

Kwon, C.S. and Shin, T.S. (1999), “Cointegration and Causality Between Macroeconomic Variables and Stock Market Returns”, Global Finance Journal, Vol. 10 No. 1, pp. 71-81.

Lee, U. (1997), “ Stock Market and Macroeconomic Policies: New Evidence From Pacific Basin Countries”, Multinational Finance Journal, Vol. 1 No. 4, pp. 273-289.

Maysami, R.C. & Koh, T.S. (2000), “ A Vector Error Correction model of the Singapore stock market”, International Review of Economics and Finance, Vol. 9 No. 1, pp.79-96.

Maysami, R.C., Lee Chuin Howe and Mohamad Atkin Hamzah (2004), “Relationship Between Macroeconomic Variables and Stock Market Indices: Cointegration Evidence From Stock Exchange of Singapores: All-S sector Indices”, Jurnal Pengurusan, Vol. 24, pp. 47-77.

Mohd Hussin, M. Y and Borhan, J. T, (2009). “Analisis Perkembangan Pasaran Saham Islam di Malaysia”. Jurnal Syariah, Vol. 17 No. 3, pp. 431-456.

Mohd Hussin, M. Y and Muhammad, F (2011), “Analisis Perkembangan Bursa Malaysia dan Pasaran Saham Islam di Malaysia” Jurnal Teknologi, Vol. 56, pp. 65-80.

Mukherjee, T.K. and Naka, A. (1995), “Dynamic Relationship Between Macroeconomic Variables and The Japanese Stock Market: An Aplication of a Vector Error Correction Model”, The Journal of Financial Research, Vol. 18 No. 2, pp. 223-237.

Puah, C. H and Jayaraman, T. K (2007), “Macroeconomic Activities and Stock Prices in a South Pacific Island Economy”, International Journal of Economics and Management, Vol.1 No.2, pp. 229-244.

Rad, A. A. (2011), “Macroeconomic Variables and Stock Market: Evidence From Iran”, International Journal of Economics and Finance Studies, Vol. 3 No. 1, pp. 1-10

Rasiah, R. R. V. (2010), “Macro Economic Activity and The Malaysian Stock Market; Empirical Evidence of Dynamic Relationship”, International Journal of Economics And Finance Studies, Vol. 4 No.2, pp.59-62

Securities Commission Malaysia (2011), List of Shariah-compliant Securities by the Shariah Advisory Council of the Securities Commission Malaysia, Kuala Lumpur: Securities Commission Malaysia

Shabri, M., A. K. Meera, PP. A. Aziz and M. PP. Ibrahim (2001), “The Relationship Between Stock Returns and Inflation: Evidence From Malaysia and Indonesia”, Proceedings of The Malaysia Finance Association Third Annual Symposium. Management Center: International Islamic University Malaysia. p. 517-547.

Sohail, N. and Hussain, Z. (2009). “Long-Run and Short-Run Relationship between Macroeconomic Variables and Stock Prices in Pakistan: The Case of Lahore Stock Exchange”. Pakistan Economic and Social Review, Vol.47 No. 2, pp. 183-198.

Wongbangpo, P and Sharma, S. C. (2002), “Stock Market and Macroeconomic Fundamental Dynamic Interaction: ASEAN-5 Countries”. Journal of Asian Economics, Vol. 13, No. 1, pp. 27-51.

Yusof, R. (2003), “The Link Between Monetary Policy And Stock market Behaviour: An Empirical Investigation on Malaysia 1977-2000”, (UIAM: PhD Thesis).
How to Cite
Mohd Hussin, M. Y., Muhammad, F., Amirah Awang, S., & Ibrahim, M. F. (2019). ISLAMIC STOCK MARKET AND MACROECONOMIC VARIABLES: A COMPARISON ANALYSIS. Journal of Contemporary Issues and Thought, 2, 41-56. Retrieved from