Sharia Stock Index and Economic Activity in Malaysia : Is There a Connection ?

Abstract

The purpose of this study is to investigate whether stock market can predict economic activity in Malaysia, with the Industrial production index as proxy for real economic output and 3month Malaysian Treasury-bill rate as a proxy for the interest rate and monetary policy. The underlining motivation is to ascertain the levels of influence, Shariah index has on real sector growth and to see at what level Conventional index has influential power, greater or smaller than Shariah index to policy makers who are concerned with real sector growth. The data used are the monthly closing of the selected stock market indices for the period of 31 October 2006 to 30 March 2012. This study employs a time series technique, in particular, co integration, error correction modeling, and variance decomposition. Result show that Shariah Index is a better predictor of the real economic activity as compared to the Conventional index. Therefore, policy makers should be more cautious about the stock market dynamics in Malaysia, especially the Shariah index, which could be vital to the improvement and state of the economy.