Is the effect of inflation on shariah (islamic) stock and conventional stock different ? evidence from Malaysia

Abdullah Omar and Abul Masih

MPRA Paper from University Library of Munich, Germany

Abstract: Study of the relationship between inflation and stock prices as to whether stocks provide a hedge against inflation has important implications for investors. Many research have been conducted focusing on the relationship between inflation and stock prices which have produced mixed results depending on the time horizon. The paper looks into this relation within the Shariah (Islamic) objective which promotes wealth protection whilst being Shariah compliant. By investing in Shariah compliant stocks a person ensures his adherence to his faith and at the same time he is able to provide added value of wealth creation and protection. Given the young age of Shariah compliant indices, long span of data is a perennial problem most Islamic finance research face when involving time series. Nonetheless, using a vector error correction approach (VECM) and variance decompositions (VDC), we try to reconcile the theoretical long run relationship between stock returns (particularly Shariah compliant stocks) and inflation to that of reality. Our results show a negative relation between stock indices and inflation, similar to previous studies on the short run relationship of the two.Our results tend to indicate that the impact of inflation on stocks is similar irrespective of its being Shariah compliant or otherwise. As to whether stocks serve as a hedge against inflation, in the short run the results are against the Fisher hypothesis but could have been otherwise given a longer time horizon as it would take a longer period before inflation is reflected in stock returns.

Keywords: Shariah (Islamic) stocks; conventional stocks; inflation; Malaysia (search for similar items in EconPapers)
JEL-codes: C22 C58 E44 (search for similar items in EconPapers)
Date: 2017-06-30
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