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Can country risks predict Islamic stock index? Evidence from Indonesia

Can country risks predict Islamic stock index? Evidence from Indonesia This study aims to examine the relationship between the Indonesian Islamic capital market, the country's risk and macroeconomic factors.Design/methodology/approachThis study uses the Johansen cointegration test and the vector error correction model (VECM) on monthly data from January 2003 to March 2016 to examine the variables that influenced the Islamic capital market proxied by the Jakarta Islamic Index (JII).FindingsThe findings indicate the existence of short-term and long-term cointegrations between country risk (political, economic and financial risks), macroeconomic variables (industrial production index, inflation and oil price) and JII. In the long run, financial risk positively affects the JII, whereas economic risks and inflation are negatively related. In the short run, only inflation affect negatively the JII.Practical implicationsThe study emphasizes the critical role of financial risk in affecting the Islamic capital market. Investors negatively respond to higher financial risk and react positively to more increased economic threats. The variable of financial risk has the highest coefficient, indicating that the investors favour a conducive financial environment in deriving JII.Originality/valueThis study extends the previous literature with an attempt to empirically examine the influence of Indonesia's country risk on the Islamic stock market through VECM. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Islamic Accounting and Business Research Emerald Publishing

Can country risks predict Islamic stock index? Evidence from Indonesia

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References (57)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1759-0817
DOI
10.1108/jiabr-04-2020-0127
Publisher site
See Article on Publisher Site

Abstract

This study aims to examine the relationship between the Indonesian Islamic capital market, the country's risk and macroeconomic factors.Design/methodology/approachThis study uses the Johansen cointegration test and the vector error correction model (VECM) on monthly data from January 2003 to March 2016 to examine the variables that influenced the Islamic capital market proxied by the Jakarta Islamic Index (JII).FindingsThe findings indicate the existence of short-term and long-term cointegrations between country risk (political, economic and financial risks), macroeconomic variables (industrial production index, inflation and oil price) and JII. In the long run, financial risk positively affects the JII, whereas economic risks and inflation are negatively related. In the short run, only inflation affect negatively the JII.Practical implicationsThe study emphasizes the critical role of financial risk in affecting the Islamic capital market. Investors negatively respond to higher financial risk and react positively to more increased economic threats. The variable of financial risk has the highest coefficient, indicating that the investors favour a conducive financial environment in deriving JII.Originality/valueThis study extends the previous literature with an attempt to empirically examine the influence of Indonesia's country risk on the Islamic stock market through VECM.

Journal

Journal of Islamic Accounting and Business Research – Emerald Publishing

Published: Sep 3, 2021

Keywords: Country risk; Vector error correction model; Islamic Capital market; Macroeconomic variables; Jakarta stock exchange Islamic index

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