Abstract:
This study aimed to examine the Islamic stock market integration between Indonesia and Malaysia, and the effect of foreign interest rates on both stock markets. This study used the monthly time series of Jakarta Islamic Index, Hijrah Syariah Index, and foreign interest rates within a period from August 2000 to January 2016. Result of cointegration test demonstrates that while there is a cointegration between Jakarta Islamic Index and Hijrah Shariah Index, no cointegration occurred between Jakarta Islamic Index, Hijrah Shariah Index, and foreign interest rates. Estimation result of the VAR model indicates that there is a long-run relationship between Jakarta Islamic Index and Hijrah Shariah Index, and that there is integration between Indonesian and Malaysian Islamic stock markets. Furthermore, estimation result of the VARX model reveals that foreign interest rates only affected Malaysian Islamic stock price index.
Machine summary:
Estimation result of the VAR model indicates that there is a long-run relationship between Jakarta Islamic Index and Hijrah Shariah Index, and that there is integration between Indonesian and Malaysian Islamic stock markets.
Furthermore, estimation result of the VARX model reveals that foreign interest rates only affected Malaysian Islamic stock price index .
As far as the statistical perspective is concerned, two stock markets are said to be integrated if they have a long-run equilibrium relationship and if the trend of their prices moves toward the same direction (Karim & Karim, 2012).
Result of a test run by the International Capital Asset Pricing Model (ICAPM) on the weekly data spanning from February 1988 to September 2009 indicated that there was no integration between Malaysian and Singaporean stock markets.
To examine the effect of foreign interest rates on the Islamic stock market integration between Indonesia and Malaysia, we used a VAR model with exogenous variable, as proposed by Pesaran et al.
Results of estimating the parameters of the VARX(2) model with respect to the test on the effect of foreign interest rates on the integration between Islamic stock markets in Indonesia and Malaysia are summarized in Table 5.
The estimation result of the VAR model indicates that in the long term, there is a relationship between Indonesian Islamic stock price index and Malaysian Islamic stock price index, so, there is an integration of Islamic stock market between Indonesia and Malaysia.