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The different impact of conventional interest rates on Islamic stock market, Islamic banking and Islamic insurance: evidence from Malaysia

Author

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  • Othman, Arshad Nuval
  • Masih, Mansur

Abstract

This paper seeks to close the gap of the lack of empirical evidence surrounding the different impact of conventional interest rates on Islamic finance components – Islamic stock markets, Islamic banking and Islamic insurance (called takaful). Such evidence remains imperative in order for the Islamic finance system to formulate effective countermeasures against changes in conventional interest rates. Using Malaysia as a case in point, this paper employs time-series techniques to establish long-run and causal relationships among an Islamic stock market, an Islamic bank stock, an Islamic insurance company stock, the overnight conventional interbank money market rate and several control variables. Results suggest the distinct interaction of each Islamic finance component with conventional interest rates – the positive long-run relationship and bidirectional causality between Islamic stock markets and conventional interest rates, the negative long-run relationship and bidirectional causality between Islamic banking and conventional interest rates, and the negative long-run relationship and unidirectional causality from Islamic insurance to conventional interest rates. Policymakers should remain concerned primarily with the impact of conventional interest rates on Islamic stock markets and Islamic banking due to the negative income gap of Islamic banks which expose the Islamic finance system to higher financial risk. Thus, policymakers should incentivize Islamic banks to convert the negative income gap into a positive income gap through imposing higher capital requirements on fixed-rate nominal assets.

Suggested Citation

  • Othman, Arshad Nuval & Masih, Mansur, 2014. "The different impact of conventional interest rates on Islamic stock market, Islamic banking and Islamic insurance: evidence from Malaysia," MPRA Paper 63285, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:63285
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    File URL: https://mpra.ub.uni-muenchen.de/63285/1/MPRA_paper_63285.pdf
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    References listed on IDEAS

    as
    1. Flannery, Mark J. & Hameed, Allaudeen S. & Harjes, Richard H., 1997. "Asset pricing, time-varying risk premia and interest rate risk," Journal of Banking & Finance, Elsevier, vol. 21(3), pages 315-335, March.
    2. Papadamou, Stephanos & Siriopoulos, Costas, 2014. "Interest rate risk and the creation of the Monetary Policy Committee: Evidence from banks’ and life insurance companies’ stocks in the UK," Journal of Economics and Business, Elsevier, vol. 71(C), pages 45-67.
    3. Fernandez-Perez, Adrian & Fernández-Rodríguez, Fernando & Sosvilla-Rivero, Simón, 2014. "The term structure of interest rates as predictor of stock returns: Evidence for the IBEX 35 during a bear market," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 21-33.
    4. Kim, Suk-Joong & Nguyen, Do Quoc Tho, 2009. "The spillover effects of target interest rate news from the U.S. Fed and the European Central Bank on the Asia-Pacific stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(3), pages 415-431, July.
    5. 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.
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    More about this item

    Keywords

    Islamic stock market; Islamic banking; Islamic insurance; interest rates; 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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