Does shariah stock index lead or lag the exchange rate and macroeconomic variables? evidence from Japan based on ARDL

This paper aims to investigate whether shariah stock index, exchange rate and macroeconomic forces in Japan have any long run relationship or not. If the relationship exists, does the Shariah stock index lead or lag? The paper is likely to be the first study that investigates the causal relationship of aforementioned variables and the Shariah Index in Japan. Current literature on the topic in different countries gives either contradictory or inclusive results. This study will try to fill two gaps, one relating to Japan, and another relating to Islamic Indices. This study employed quarterly data from 2007 to 2017. Auto-Regressive Distributed lag (ARDL) time series technique is applied to conduct the study. This technique is free from major limitations of the conventional cointegrating tests which suffer from the pre-test biases involved in the unit roots and cointegration.The empirical evidence tends to suggest that both in the short- and long- run, money supply, exchange rate, and GDP have a significant relationship with Japan’s Shariah stock prices. However, ARDL’s long run coefficients suggest that inflation does not have such impact on the Shariah stock price. The findings of the study tend to indicate that investors of shariah stocks in Japan and the Japanese government need to be more attentive to the money supply and exchange rate of the country. The findings of this study are plausible and have strong policy implications for an export-oriented country such as Japan.