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Information transmission between Islamic stock indices in South East Asia

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Author Info

  • Fahmi Abdul Rahim
  • Noryati Ahmad
  • Ismail Ahmad
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    Abstract

    Purpose – The purpose of this paper is to investigate the transmission of information (at return and volatility level) as well as the correlation between Kuala Lumpur Syariah and Jakarta Islamic Indices. Design/methodology/approach – The daily return from July 4, 2000 to December 29, 2006 was employed in the bivariate VAR GJR-GARCH model. Findings – The results indicate significant unidirectional return and volatility transmissions from Kuala Lumpur Syariah and the Jakarta Islamic Indices. There is no evidence of asymmetric effects in volatility for both markets. However, volatility is highly persistent and mean-reverting in each market. The findings also revealed that there is low correlation between the two Islamic stock markets investigated. Research limitations/implications – The data used in this study are limited to the Islamic stock markets located in South East Asia, concentrating more on the post-economic crisis period analysis. Further research may be conducted using a different time period and frequency of data while utilizing more Islamic indices. In addition, future research may look at and compare the market interdependence of Islamic stock markets in different economic conditions such as the pre-economic crisis period, during an economic crisis period or post-economic crisis period. Practical implications – Market participants such as investors and market analysts should include the Malaysian Islamic stock market in forecasting market price movement and the volatility of the Indonesian Islamic stock market. In addition, both the Kuala Lumpur Syariah and Jakarta Islamic Indices offer potential for diversification to investors who wish to create an Islamic portfolio investment. From the regulator point of view, this study highlighted the fact that the Jakarta Stock Exchange should consider the Malaysian Islamic stock market in setting its policy to control the volatility of the Indonesian Islamic stock market because the source of volatility in Indonesian market is not only from the market itself, but also from the Malaysian market. On the other hand, in controlling the volatility of the Islamic Malaysian market, Bursa Malaysia should only implement a policy related to the Malaysian market because the source of volatility only comes from the local markets. Finally, the policy makers in both markets do not need to implement long-range measures to reduce the impact of volatility persistence in these markets. Originality/value – This is the first paper to investigate information transmission and market interdependence between the Islamic stock markets in South East Asia.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal International Journal of Islamic and Middle Eastern Finance and Management.

    Volume (Year): 2 (2009)
    Issue (Month): 1 (April)
    Pages: 7-19

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    Handle: RePEc:eme:imefpp:v:2:y:2009:i:1:p:7-19

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    Web page: http://www.emeraldinsight.com

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    Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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    Related research

    Keywords: Financial markets; Information transfer; Islam; South East Asia; Stock exchanges;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Robert F. Engle & Victor K. Ng, 1991. "Measuring and Testing the Impact of News on Volatility," NBER Working Papers 3681, National Bureau of Economic Research, Inc.
    2. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    3. Baur, Dirk & Jung, Robert C., 2006. "Return and volatility linkages between the US and the German stock market," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 598-613, June.
    4. Yutaka Kurihara & Eiji Nezu, 2006. "Recent stock price relationships between Japanese and US stock markets," Studies in Economics and Finance, Emerald Group Publishing, vol. 23(3), pages 211-226, August.
    5. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    6. Kim, Suk-Joong, 2005. "Information leadership in the advanced Asia-Pacific stock markets: Return, volatility and volume information spillovers from the US and Japan," Journal of the Japanese and International Economies, Elsevier, vol. 19(3), pages 338-365, September.
    7. Syriopoulos, Theodore, 2007. "Dynamic linkages between emerging European and developed stock markets: Has the EMU any impact?," International Review of Financial Analysis, Elsevier, vol. 16(1), pages 41-60.
    8. Richard D. F. Harris & Anirut Pisedtasalasai, 2006. "Return and Volatility Spillovers Between Large and Small Stocks in the UK," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(9-10), pages 1556-1571.
    9. Guglielmo Caporale & Nikitas Pittis & Nicola Spagnolo, 2006. "Volatility transmission and financial crises," Journal of Economics and Finance, Springer, vol. 30(3), pages 376-390, September.
    10. In, Francis & Kim, Sangbae & Yoon, Jai Hyung & Viney, Christopher, 2001. "Dynamic interdependence and volatility transmission of Asian stock markets: Evidence from the Asian crisis," International Review of Financial Analysis, Elsevier, vol. 10(1), pages 87-96.
    11. Mario Reyes, 2001. "Asymmetric volatility spillover in the Tokyo stock exchange," Journal of Economics and Finance, Springer, vol. 25(2), pages 206-213, June.
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