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Interest Rate, Exchange Rate, and Stock Prices of Islamic Banks: A Panel Data Analysis


  • Ayub, Aishahton
  • Masih, Mansur


Understanding the empirical relationship between the exchange rates, interest rates and stock prices are important and useful to the policy makers, professional investors and academics. Although the scholars and practitioners have studied the subject extensively, few empirical studies are available in the context of the Islamic banking stock prices. In this paper, we make an humble attempt to fill in this gap in the empirical literature of Islamic banking, in particular. We use panel cointegration and panel vector error-correction (VECM) model to examine the existence and direction of the causal relationship between exchange rate, interest rate and Islamic banking sector stock prices using monthly data over the last five years. The VECM is employed to discern the short-run and long-run Granger causality by applying the dynamic Generalized Method of Moments (dynamic GMM). For 40 Islamic banks, the empirical results tend to indicate that the Islamic bank stock prices have negative significant relationship with the exchange rates but no significant relationship with the interest rates. In addition, we found that there exists a bidirectional Granger-causal relationship between the Islamic bank stock prices and exchange rates. This finding tends to suggest that this significant relationship between the exchange rates and Islamic bank stock prices should be borne in mind by the policy makers while formulating their policies.

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  • Ayub, Aishahton & Masih, Mansur, 2013. "Interest Rate, Exchange Rate, and Stock Prices of Islamic Banks: A Panel Data Analysis," MPRA Paper 58871, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:58871

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    References listed on IDEAS

    1. Solnik, Bruno, 1987. " Using Financial Prices to Test Exchange Rate Models: A Note," Journal of Finance, American Finance Association, vol. 42(1), pages 141-149, March.
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    3. Cole, Rebel A. & Moshirian, Fariborz & Wu, Qiongbing, 2008. "Bank stock returns and economic growth," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 995-1007, June.
    4. Choi, Jongmoo Jay & Elyasiani, Elyas & Kopecky, Kenneth J., 1992. "The sensitivity of bank stock returns to market, interest and exchange rate risks," Journal of Banking & Finance, Elsevier, vol. 16(5), pages 983-1004, September.
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    6. Kasman, Saadet & Vardar, Gülin & Tunç, Gökçe, 2011. "The impact of interest rate and exchange rate volatility on banks' stock returns and volatility: Evidence from Turkey," Economic Modelling, Elsevier, vol. 28(3), pages 1328-1334, May.
    7. Syed Tehseen JAWAID & Anwar Ul HAQ, 2012. "Effects of interest rate, exchange rate and their volatilities on stock prices: evidence from banking industry of Pakistan," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(8(573)), pages 153-166, August.
    8. Shen, Chung-Hua & Chen, Chien-Fu, 2008. "Causality between banking and currency fragilities: A dynamic panel model," Global Finance Journal, Elsevier, vol. 19(2), pages 85-101.
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    Cited by:

    1. Nurasyikin Jamaludin & Shahnaz Ismail & Syamimi Ab Manaf, 2017. "Macroeconomic Variables and Stock Market Returns: Panel Analysis from Selected ASEAN Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 37-45.

    More about this item


    Exchange rate; Interest rate; Islamic bank stock prices; panel cointegration; panel vector error-correction (VECM); dynamic GMM; Granger-causality;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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