US unconventional monetary policy and Islamic equity indices

Abstract

PurposeThis paper aims to constitute to the first empirical work that investigated the effects of US unconventional monetary policy shocks on Islamic equities.Design/methodology/approachThe authors used the spread between sovereign (term spread) and corporate (corporate spread) yields as proxies of unconventional monetary policy in times that FED implemented different rounds of large-scale asset purchasing programs.FindingsThis paper demonstrates that monetary policy shocks have significant effects on Islamic equities. The analysis showed substantial evidence that the corporate spread innovation was reflected as a positive signal in Islamic equity markets and has a larger impact on Islamic low leverage equities than term spread.Originality/valueThe objective of this paper is to shed some insight into the effects of US unconventional monetary policy on low leverage financial assets. It is hypothesized that during this period, specifically from November 2008, unconventional monetary policy and zero bound interest rates have been implemented in the US economy. However, the strength of effects of this range of policies on Islamic financial products is unidentified.