• Shahrin Saaid Shaharuddin University of Malaya
  • Wee-Yeap Lau University of Malaya
  • Tien-Ming Yip University of Malaya
Keywords: Islamic Equity Style Index, Leading Economic Indicator, Macroeconomic variables


This study aims to investigate whether the Islamic equity style index containseconomic information which is useful for investors and financial practitioners. Thestudy fills the gap in the previous literature by investigating the relationshipbetween Islamic equity style indices and macroeconomic variables. Using aVector Autoregressive (VAR) model with monthly data from June 2006 to May2017, our results show that first, there is unidirectional flow of information fromLarge Growth (LG) to the Leading Economic Indicator (LEI); second, LargeGrowth (LG) Granger-causes the Kuala Lumpur Composite Index (KLCI); third,Large Value (LV) also Granger-causes KLCI. A robustness check with anAugmented VAR model obtained similar results to the short-run model. Ourresults imply that equity style indices have prior information which is faster thanLEI and KLCI. This knowledge is certainly useful for fund managers whendesigning Shariah-compliant portfolio investments. For policymakers, Islamicequity style indices are useful for predicting the direction of other macroeconomicvariables such as business cycles, and hence help to predict the future directionand turning points in the economy.


Abbes, S. M., Mostéfa, B., Seghir, G. M., & Zakarya, G.Y. (2015). Causal Interactions between FDI, and Economic Growth: Evidence from Dynamic Panel Co-Integration. Procedia Economics and Finance, 23, 276 – 290.

Acikalin, S., Aktas, R., Unal, S. (2008). Relationships Between Stock Markets and Macroeconomic Variables: an Empirical Analysis of the Istanbul Stock Exchange. Investment Management and Financial Innovations, 5(1), 8-16.

Ahmed, P. (2001). Forecasting Correlations among Equity Mutual Funds. Journal of Banking and Finance, 25, 1187–1208.

Ahmed, R.R., Vveinhardt, J., Streimikiene, D., & Fayyaz, M. (2017). Multivariate Granger Causality between Macro Variables and KSE 100 Index: Evidence from Johansen Cointegration and Toda & Yamamoto Causality. Economic Research, 30(1), 1497-1521.

Ajmi, A., Hammoudeh, S., Nguyen, D., & Sarafraziba, S. (2014). How Strong are the Causal Relationships between Islamic Share Markets and Conventional Financial Systems? Evidence from Linear and Nonlinear Tests. Journal of International Financial Markets, Institutions & Money, 28, 213– 227.

Alam, M.J., Begum, I.A., Buysse, J., & Huylenbroeck, G. (2012). Energy Consumption, Carbon Emissions and Economic Growth Nexus in Bangladesh: Co-integration and Dynamic Causality Analysis. Energy Policy, 45, 217–225.

Albaity, M., & Ahmad, R. (2008). Performance of Syariah and Composite Indices: Evidence from Bursa Malaysia. Asian Academy of Management Journal of Accounting and Finance, 4(1), 23-43.

Awokuse, T. O. (2003). Is the Export-led Growth Hypothesis Valid for Canada? Canadian Journal of Economics/Revue Canadienne d'Économique, 36, 126–136. doi: 10.1111/1540-5982.00006

Banerjee, A., & Marcellino, M. (2009). Factor-augmented Error Correction Models. In: J. Castle & N. Shepard (Eds.), The Methodology and Practice of Econometrics — a Festschrift for David Hendry. (pp. 227–254). Oxford: Oxford University Press.

Bank Negara Malaysia (Online). Retrieved 4 November 2010, from

Burkart, O., & Coudert., V. (2002). Leading Indicators of Currency Crises for Emerging Countries. Emerging Markets Review, 3, 107-133.

Burns, A.F., & Mitchell, W.C. (1945). Measuring Business Cycles. National Bureau of Economic Research, NY.

Camilleri, S.J., Scicluna, N., & Bai, Y. (2019). Do Stock Markets Lead or Lag Macroeconomic Variables? Evidence from Select European countries. North American Journal of Economics and Finance, 48, 170-186.

Chen, N., Roll, R., & Ross, S. A. (1986). Economic Forces and the Stock Market. Journal of Business, 59, 383-403.

Chen, S.W. (2007). Measuring Business Cycle Turning Points in Japan with the Markov Switching Panel Model. Mathematics and Computers in Simulation, 76, 263–270.

Click, R., & Plummer, M. (2005). Stock Market Integration in ASEAN after the Asian Financial Crisis. Journal of Asian Economics, 16, 5–28.

Datastream (2011). Thomson Reuters Datastream. [Online]. Retrieved November 2011, from Subscription Service..

De Bondt, W. F. M., & Thaler, R. M. (1985). Does the Stock Market Overreact? Journal of Finance, 40(3), 793-805.

De la Grandville, O. (2001). Bond Pricing and Portfolio Analysis. MIT Press, pp.248-252

Department of Statistics Malaysia. (2017). Malaysia Economic Indicators: Leading, Coincident & Lagging Indices. Government Printers, Kuala Lumpur, various issues from 2000 – 2017.

Diamandis, P. (2009). International Stock Market Linkages: Evidence from Latin America. Global Finance Journal, 20, 13–30.

Diebold, F. X., & Rudebusch, G.D. (1991). Forecasting Output with the Composite Leading Index: A Real-time analysis. Journal of the American Statistical Association, 86(415), 603-610.

Diebold, F. X., Gunther, T., & Tay, A. (1998). Evaluating Density Forecasts with Applications to Financial Risk Management. International Economic Review, 39, 863–883.

Dolado. J., & Liitkepohl, H. (1996). Making Wald Tests Work for Cointegrated VAR System. Econometric Reviews, 15, 369--386.

Elliott, G., Rothenberg, T.J, & Stock J.H. (1996). Efficient Tests for an Autoregressive Unit Root. Econometrica, 64(4), 813–836.

Engle, R. F., & Granger, C. W. J. (1987). Cointegration and Error Correction: Representation, Estimation, and Testing. Econometrica, 55, 251-276.

Fabozzi, F. (1998) Handbook of Portfolio Management. New Hope, Pennsylvania: Frank J. Fabozzi Associates.

Fama, E.F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. Journal of Finance, 25, 383–417.

Fama, E. F. (1981). Stock Returns, Real Activity, Inflation and Money. The American Economic Review, 71(4), 45-565.

Fama, E.F., & French, K.R. (1992). The Cross-Section of Expected Stock Returns. Journal of Finance, 47(2), 427–465.

Ferrara, L., Marcellino, M., & Mogliani, M. (2015). Macroeconomic Forecasting during the Great Recession: The Return of Non-linearity? International Journal of Forecasting, 31, 664–679.

Filardo, A. (1994). Business-Cycle Phases and Their Transitional Dynamics. Journal of Business & Economic Statistics, 12(3), 299-308.

Frankel, J., & Saravelos, G. (2012). Can Leading Indicators Assess Country Vulnerability? Evidence from the 2008–09 Global Financial Crisis. Journal of International Economics, 87, 216–231.

Gan, C., Lee, M., Yong, H.H.A., & Zhang, J. (2006). Macroeconomic Variables and Stock Market Interactions: New Zealand Evidence. Investment Management and Financial Innovations, 3(4), 89-101.

Gaudreault, C., Lamy, R., & Liu, Y. (2003). New Coincident, Leading and Recession Indexes for the Canadian Economy: An Application of the Stock and Watson Methodology. Working Paper 2003-12, Department of Finance, Canada.

Giuliodori, D., & Rodriguez, A. (2015). Analysis of the Stainless Steel Market in the EU, China and US using Cointegration and VECM. Resources Policy, 44, 12–24.

Granger, C.W.J. (1969). Investigating Causal Relations by Econometric Models and Cross-Spectral Methods. Econometrica, 37, 424-438.

Gupta, R., & Guidi, F. (2012). Cointegration Relationship and Time-varying Co-movements among Indian and Asian Developed Stock Markets. International Review of Financial Analysis, 21, 10–22.

Hallam, D., & Zanoli, R. (1993). Error-correction Models and Agricultural Supply Response. European Review of Agricultural Economics, 20(2), 155-166. ISSN 1467- 9353. doi: 10.1093/erae/20.2.151.

Hamilton, J.D., & Perezquiros, G. (1996). What Do the Leading Indicators Lead? The Journal of Business, 69(1), 27-49.

Hashemzadeh, N., & Taylor, P. (1988). Stock Prices, Money Supply, and Interest Rates: The Question of Causality. Applied Economics, 20(12), 1603-1611.

Hussin, M.Y.M., Muhammad, F., Hussin, M.F.A., & Razak, AA (2012). The Relationship between Oil Price, Exchange Rate and Islamic Stock Market in Malaysia. Research Journal of Finance and Accounting, 3(5), 83-92.

Hussin, M.Y.M., Muhammad, F., Awang, S.A. Marwan, N.F., & Razak, A.A. (2013). The Dynamic Interaction between Islamic Stock Market and Strategic Commodities. Journal of Islamic Economics, Banking and Finance, 9(3), 54-68.

Ibrahim, M.H., & Aziz, H. (2003). Macroeconomic Variables and the Malaysian Equity Market. Journal of Economic Studies, 30(1), 6-27.

Jan Babecký, J., Havránek, T., Mat, J., Rusnák, M., Smídková, K., & Vasícek, B. (2013). Leading Indicators of Crisis Incidence: Evidence from Developed Countries. Journal of International Money and Finance, 35, 1–19.

Johansen, S., & Juselius, K. (1990). Maximum Likelihood Estimation and Inference on Cointegration with Application to the Demand for Money. Oxford Bulletin of Economics and Statistics, 52, 169–221.

Johansen, S., & Juselius, K. (1992). Testing Structural Hypotheses in a Multivariate Cointegration Analysis of the PPP and the UIP for the UK. Journal of Econometrics,. 53, 211–244.

Johansen, S. (1988). Statistical Analysis of Cointegration Vectors. Journal of Economic Dynamics & Control, 12, 231–254.

Johansen, S., & Nielsen, B. (1993). Asymptotics for Co-integration Rank Test in the Presence of Intervention Dummies: Manual for the Simulation Program DisCo, Reprint. The University of Copenhagen.

Juselius, K. (1994). On the Duality Between Long-Run Relations and Common Trends in the I(1) and the I(2) case: An Application to the Aggregate Money Holdings. Econometric Reviews, 13, 151–178.

Khalichi, A. E., Humayun, K. S., Arouri, M., & Teulon, F. (2014). Are Islamic Indices More Efficient than their Conventional Counterparts? Evidence from Major Global Families. The Journal of Applied Business Research, 30(4), 1137-1150.

Khandelwal, R. (2018). An Econometric Analysis of Linkages between Macroeconomic Variables and Stock Markets: Evidence from Asian Emerging Markets. International Journal of Financial Management, 8(1), 27-35.

Kumar, K.K., & Sahu. B. (2017). Dynamic Linkages between Macroeconomic Factors and Islamic Stock Indices in a Non-Islamic country India. Journal of Developing Areas, 51(1), 193-205.

Kwoon, C.S., & Shin, T.S. (1999). Cointegration and Causality between Macroeconomic Variables and Stock Market Returns. Global Finance Journal, 10(1), 71-81.

Lau, W.Y., & Lee, C. (2015). Testing the Efficacy of Information Transmission: Is Equity Style Index Better than Stock Market Index? Economics and Management, 18(3), 4-17.

Lau, W.Y. (2005). How Persistent is Equity Style Performance Among Malaysian Fund Managers? Osaka Economic Papers, 55(3), 64-82.

Liew, J., &Vassalou, M. (1999). Can Book-to-Market, Size and Momentum be Risk Factors that Predict Economic Growth? Journal of Financial Economics, 57, 221-245.

Lin, T., & Lin., Z.H. (2011). Are Stock and Real Estate Markets Integrated? An Empirical Study of Six Asian Economies. Pacific-Basin Finance Journal, 19, 571–585.

Lo, A.W., & Mackinlay, AC (1987). Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test. Working paper 28-87, Rodney L. White Centre, Wharton School, University of Pennsylvania.

Maysami, R. C., & Sim, H. H. (2002). Macroeconomics Variables and their Relationship with Stock Returns: Error Correction Evidence from Hong Kong and Singapore. The Asian Economic Review, 44(1), 69-85.

McNown, R., & Seip, K.L. (2011). Periods and Structural Breaks in US Economic History 1959–2007. Journal of Policy Modeling, 33, 169–182.

Megna, R., & Xu, Q. (2003). Forecasting the New York State Economy: The coincident and Leading Indicators Approach. International Journal of Forecasting, 19, 701–713.

Mookerjee, R., & Yu, Q. (1997). Macroeconomic Variables and Stock Prices in a Small Open Economy. The Case of Singapore. Pacific-Basin Finance Journal, 5, 377-388.

Mosconi, R., & Giannini, X. (1992). Non-causality in Cointegrated Systems: Representation Estimation and Testing. Oxford Bulletin of Economics and Statistics, 54(3), 399–417.

Obben, J. (1998). The Demand for Money in Brunei. Asian Economic Journal, 12(2), 109-121. ISSN 1467-8381. doi: 10.1111/1467-8381.00055.

Qin, D., Cagas, M.A., Ducanes, G., Magtibay-Ramos, N., & Quising, P. (2008). Automatic Leading Indicators Versus Macro-econometric Structural Models: A Comparison of Inflation and GDP Growth Forecasting. International Journal of Forecasting, 24, 399–413.

Semra, K., & Ayhan, K. (2003). Investigating Causal Relations among Stock Market and Macroeconomic Variables: Evidence from Turkey. International Journal of Economic Perspectives, 4(3), 501-507.

Shaharuddin, S. S., Lau, W.Y., & Ahmad, R. (2017a). Constructing Fama-French Factors from Style Indices: Evidence from the Islamic Equity Market, Emerging Markets Finance, and Trade, 53(7), 1563-1572. doi: 10.1080/1540496X.2016.1278529.

Shaharuddin, S. S., Lau, W.Y., & Ahmad, R. (2017b). New Islamic Equity Style Indices: Constructing and Testing the Efficacy of Information Transmission. Cogent Economics and Finance, 5, 1-19. doi: 10.1080/23322039.2017.1363355

Shaharuddin, S. S., Lau, W.Y., & Yip, T.M. (2017). Dynamic Linkages between Newly Developed Islamic Equity Style Indices: Is Growth Style more Influential than Value Style? Capital Market Review, 27(2), 49-64.

Simkins, S. (1995). Forecasting with Vector Autoregressive (VAR) Models Subject to Business Cycle Restrictions. International Journal of Forecasting, 11, 569-583.

Sims, C. (1980). Macroeconomics and Reality. Econometrica, 48(1), 1–48.

Spierdijk, L., & Umar., Z. (2014). Stocks for the Long Run? Evidence from Emerging Markets. Journal of International Money and Finance, 47, 217-238.

Stock, J.H., & Watson, M.W. (1989). New Indexes of Coincident and Leading Economic Indicators. NBER Macroeconomics Annual, 4, 351-409. Sustainability Indicators, 101. (2010). Retrieved from

Tan L.Y., & Lau, W.Y. (2013). Does Equity Style Index Play a Role in Transmitting Economic Information? Evidence from Selected Asia-Pacific Countries. In: M.N Norashidah (Ed), Readings on Applied Economics Issues. McGraw-Hill, ISBN 978-967-5771-89-7.

Toda, H.Y., & Yamamoto (1995) Statistical Inference in Vector Autoregressions with Possibly Integrated processes. Journal of Econometrics, 66, 225-250.

Vassalou, M. (2003). News Related to Future GDP Growth as a Risk Factor in Equity Returns. Journal of Financial Economics, 68, 47–73.

Wahyudi, I., & Sani. GA, (2014). Interdependence Between the Islamic Capital Market and Money Market: Evidence from Indonesia. Borsa Istanbul Review, 14, 32-47.

Yahya, M., Muhammad, F., Awang, S.A., & Ibrahim, M.F. (2012). Islamic Stock Market and Macroeconomic Variables: A Comparative Analysis. Journal of Contemporary Issues and Thought, 2, 41-56.

Zare, R., & Azali, M. (2014). The Association Between Aggregated and Disaggregated Stock Prices with Monetary Policy Using Asymmetric Cointegration and Error-correction Modelling Approaches. Review of Development Finance Review of Development Finance, 5, 64–69.

How to Cite
Shaharuddin, S., Lau, W.-Y., & Yip, T.-M. (2020). DO ISLAMIC EQUITY STYLE INDICES CONTAIN ECONOMIC INFORMATION?. Journal of Islamic Monetary Economics and Finance, 6(4).