Effect of US Macroeconomic Variables on the Volatility of Conventional and Islamic Indices

Abstract

The paper examined the effect of macroeconomic variables on the volatility of conventional and Islamic indices. The macroeconomic variables included economic uncertainty index, federal funds rate, money supply, volatility fear index, consumer price index, Treasury bill and Brent oil price and the stock indices were from DOW Jones and FTSE. This study employed the daily closing stock prices of 22 major global Islamic and conventional indices from eleven countries comprising, US, EU, Canada, Kuwait, Qatar, Malaysia, Japan, China, Turkey, India, and Taiwan. The obtained from the data base of Wall Street Journal and FRED database of St. Louis Federal Reserve. The study employed three standard unit root tests, the Augmented Dickey-Fuller (ADF), the Phillips-Peron (PP) and the KPSS test as well as Johansen Cointegration and VECM models. ARCH and GARCH models were also used for the estimations. The study found the presence of a long-run association between Islamic indices, broad market index, and the US macroeconomic variables. However, it was discovered that most of the US macroeconomic variables were not statistically significant in determining the conditional variances of the selected conventional and Islamic indices. The study recommends that investors in the selected countries should give emphasis to the macroeconomic environment of each respective country as it could have greater impact on the returns of the indices than the US macroeconomic variables.