Susilo Nur Aji Cokro DarsonoInternational Program for Islamic Economics and Finance (IPIEF)

University of Muhammadiyah Yogyakarta

Islamic Stock Market Volatility:

Does a Problem for Investor?

AFBE CONFERENCE 2014Bangkok, 5-6 Nov 2014

Outline• Introduction• Problem & Theories• Literature Review• Data• Methods• Empirical Results• Conclusions• References

Introduction

• Capital market is an indicator of economic growth of a country.

• The capital market plays an important role as an investment tool that is useful for development.

• Jakarta Islamic Index has a good pattern along this 5 years since 2009 until 2013.

• This paper aims to examine the effect of global and domestic macroeconomic variables on the Islamic stock market in Indonesia.

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I II III IV I II III IV I II III IV I II III IV I II III IV

2009 2010 2011 2012 2013

JII

Jakarta Islamic Index has a good pattern along this 5 years since 2009 until 2013. The pattern movement of Jakarta Islamic Index was increasing although it still volatile. In the first quarter of 2009, JII only reach 213 points and in the last quarter of 2009 JII reach 417 points. In the last quarter of 2013, JII reach 585 points, it is decreasing from the quarter 2 in 2013 which can reach 680 points.

• This paper is motivated by the different of many empirical researces about the effect of macroeconomic variables on the stock market and the curiosity of volatilty effect to the islamic stock investors

Theories

• One of the global macroeconomic variable is the Dow Jones Industrial Index

• The second macroeconomic variable is exchange rate between USD to IDR.

• Consumer price index (CPI) is used to measure the inflation rate.

• Money supply is the total amount of money available in an economy.

• BI Rate

Literature Review

• The results from Luqman Safdar research in 2013, show that macroeconomic variables have substantial influence on the stock prices.

• Study by (M. Syafii Antonio, 2013) in long term, all macro variables significantly affect.

• Research from Yusuof, 2007 finds that, interest rate is significant for Malaysia’s conventional stock market, while insignificant for the Islamic counterpart.

Data’sDescription

Method

ADFAugmented Dickey

Fuller(unit root test)

Johansen Cointegration

Test

Granger causality test

VARVector

Autoregressive

IRFImpulse Response

VDCVariance

Decomposition

Empirical ResultAugmented Dickey Fuller Test

all variables are stationary and have the same order of integration, we proceeded to test whether they were co-integrated.

• Johansen Multivariate Cointegration Test

• There is cointegration among JII and macroeconomic variables.• There is long-run or equilibrium relationship between JII, DOW, EXRATE,

CPI, M2 and BIR.

• Granger Causality Test

• A bi-directional causality result between (EXRATE and JII), (M2 and JII) and (BIR and JII)

• uni-directional causality relationship between CPI and JII.

• VAR estimation results

• EXRATE, CPI and M2 had positive influence to JII movements • BIR had negative influence to JII movements• DOW didn’t include to VAR estimation because it was not passed the Granger

Causality Test.• In addition, the f-table of f-test is 2.84. • Therefore, VAR(2) f-statistics is 3.131537 > t-table 2.84, means that we reject

Ho and accept Ha or the model is simultaneously significant.

Impulse ResponseThe 3rd defines the the response of JII to EXRATE is very volatile.

The 4th figure defines the response of JII to CPI is relatively stable.

The 5th figure defines the response of JII to M2 is relatively stable like CPI

The 6th figure defines the reponse of JII to BIR is relatively volatile.

Variance Decomposition

•It is clear that JII explained by its own shock over 100 % in the 1st month. •In the 10th month, the influence of JII to JII itself is decreased to 81.71%. •However, the highest influenced of JII in 10th month is CPI at 10.74%. •The influence of EXRATE to JII is 1.514%, the influence of M2 to JII is 0.34% and •The influence of BI Rate to JII is 3.29%.

Conclusions

• The VAR analysis shows in term the global macroeconomic variable (Dow Jones Industrial Index) is not significant influental variable to cause movements on JII.

• As for the influence of domestic macroeconomic variables (exchange rate, consumer price index and money supply) to JII movement are also significant.

• Using VAR estimation, there is long term equilibrium between Jakarta Islamic Index implying that JII integrated with global and domestic macroeconomic variables.

• The results of Granger causality test show a significant bi-directional causality between Exchange rate and JII, Money supply and JII and uni-directional causality between CPI and JII.

• Therefore, these scenario suggesting that the volatile of Jakarta Islamic Index is affected by Exchange Rate and Money supply.

Conclusions

Recommendations

• It is recommended that policymakers be cautious about responding the changes of other countries’ policies.

• Domestic investors in Islamic capital market should increased.

References

• Ariefianto, M. D. (2012). Ekonometrika, esensi dan aplikasi dengan menggunakan EViews. Jakarta: Erlangga

• Panatagama, Febryan Mujahid. (2013). The Analysis of Macroeconomic Variables that Influence Stock Returns Jakarta Islamic Index and Its VAR Forecasting.(Case study: 10 companies listed in Jakarta Islamic Index Period 2008-2012), Yogyakarta

• Granger, C. W. (1986). Developments in the Study of Cointegrated Economic Variables. Oxford Bulletin of Economics and Statistics , Vol.48, 169-178.

• H. M Ibrahim, H. A. (2003). Macroeconomic variable and the Malaysian equity market: A view through Rolling Sub Samples. Journal of Economic Studies, 30 (1) , 6-27.

• Johansen, S. (1988). Statistical Analysis of Cointegration Vectors. Journal of Economic Dynamic Control , 231-254.

• Kandir, S. Y. (2008). Macroeconomic Variables, Firm Characteristics and Stock Returns: Evidence from Turkey. International research Journal of Finance and Economics .

Thanks to

IPIEFInternational Program for

Islamic Economics & Finance

EconomicsDepartment