Dynamic interdependence between Malaysia and world major players in Islamic equity markets

Abstract

The objective of this study is to establish evidence on international stock market interdependence from a new but highly progressive segment of Islamic stock markets. It examines whether or not the structure of market interdependence in this segment is consistent with those of the brood stock markets which in general indicates that emerging markets tend to be partially integrated at the regional level but remain segmented from the world equity markets. This objective is achieved through investigating the integration between Malaysia and most important players in world Islamic equity markets, namely the US, UK, Japan and Canada as well as Asia Pacific and Europe at the regional level and world emerging and developed markets at the global platform. In this study, Japan and Asia Pacific serve the role of Malaysia's regional markets. Using daily returns of Dow Jones Islamic Market indices for the selected markets from June 1999 to June 2007, the analysis begins by generating return volatilities using Generalized Autoregressive Conditional Heteroskedostic (GARCH). The results from the vector-autoregressive analysis (VAR) to analyze the structure of dynamic linkages among the selected Islamic stock markets lead to the following conclusions. First, Malaysia is segmented from the other markets in the studied investment universe, suggesting very low correlations between Islamic equities traded in Malaysia and those traded in other markets. Second, Malaysia reacts to local news more efficiently (fully and quickly) than it reacts to news originating in the other countries. Third, Malaysia seems to have a relatively stronger intro- than inter-regional integration with the world Islamic stock markets. Malaysia is more strongly integrated with Japan than with the other non-Asian markets and with Asia Pacific and world emerging than with Europe and world developed markets. Overall, the findings imply a great prospect for Malaysian Islamic equity markets to be promoted as a viable direct and/or indirect investment vehicle to the advanced markets to enhance the benefits from international portfolio diversification.