How do Islamic equities respond to monetary actions?

Abstract

Purpose The purpose of this paper is to appraise the effectiveness of monetary policy actions in variant market conditions for Islamic stocks. These stocks offer ground for a natural experiment as they have restrictions on the line of business and their distinguished capital structure does not allow them to combat the liquidity crisis through the use of leverage. Design/methodology/approach The paper uses the quantile regression approach for a multi-country sample of Islamic stock indices to assess the impact of domestic as well as US expansionary monetary policy on stock returns of Islamic indices at various locations of distribution of returns. Findings It is found that, at lower return levels, an expansionary monetary policy has a negative effect on the returns. In other cases, there is no significant impact of policy rate change on index returns. Research limitations/implications It is more appropriate to use firm level data of Islamic stocks instead of stock indices. However, the information regarding index constituents is not publicly available. Practical implications The paper offers useful information to investors and policy makers. It shows that central banks should improve their credibility for monetary policy to be effective and their policies must be designed keeping in view the strong impact of US rate on global monetary environment. Originality/value This paper provides first empirical evidence of the impact of discount rates on the returns of Islamic stocks in different market conditions.

Impact of macroeconomic variables on the performance of stock exchange: a systematic review

“…Lee and Brahmasrene (2018) examined the effect of interest rate in the short term in Korea and did not find its impact. Anwer et al (2019) examined that change in policy rate of monetary authority has no or very little effect on emerging countries of Islamic equities as because of inefficient policy tool.…”

“…Further, the suggestion made was regarding the use of NARDL model for establishing the relation with the stock market as this model is applicable even if data are non-linear. According to Anwer et al (2019), the study can be extended using quantile regression by including more countries and variables. Tusiime and Wang (2020) examined oil price impact on Islamic stocks, proposed further study in an emerging economy, emphasizing the specific sectors without indication of the sectors.…”

Does Socially Responsible Investing Pay in Developing Countries? A Comparative Study Across Select Developed and Developing Markets

“…The higher relative levels of volatility in Asian indices as well as short-term underperformance could be traced to inherent limitations in market development and information asymmetry along with pyramid corporate hierarchy and weak regulatory frameworks as commonly observed in emerging markets (Hill et al, 2007; Tripathi & Kaur, 2020a; Ur Rehman et al, 2016; Weber, 2014). Anwer et al (2019) find that screened stock indices in emerging markets are impacted by the global monetary environment. In his study, Travers (1997) focuses on SRI outside the USA and observed 23 selected SRI mutual funds from Europe, Australasia and Asia outperforming their benchmark.…”

Interest Rate Adjustment and Stock Market – The Case Study of China

“…Through the implementation of monetary policy such as interest rate adjustment, stock prices and returns could be affected swiftly and directly (Zeng & Xie, 2006;Hu & Ma, 2019). Consequently, macroeconomic variables may also be targeted and thus to stimulate the economy (Anwer, Azmi, & Mohd, 2019).…”