Post-Crisis Interdependence Between Islamic Unit Trust Funds and Islamic Stock Market in Malaysia

Post-Crisis Interdependence Between Islamic Unit Trust Funds and Islamic Stock Market in Malaysia

Muhamad Abduh (School of Business and Economics, Universiti Brunei Darussalam, Brunei) and Ruzanna Ramli (City University Malaysia, Malaysia)
DOI: 10.4018/978-1-7998-2257-8.ch014

Abstract

This chapter evaluates short- and long-term relationships between 34 Islamic unit trusts and the Islamic stock market after the global financial crisis. The study collects data from Bloomberg's database from 2009 until 2012 and employs J-J cointegration to identify the long-term relationship while Granger causality test is used to investigate how the changes in Islamic stock market can influence the changes in Islamic unit trusts in the short term. The finding indicates that 61.76 percent out of the 34 Islamic unit trusts tested do not have long-term equilibrium with the Islamic stock market. Furthermore, only a few Islamic trusts responded to the changes in the Islamic stock market. This study is important for at least two reasons: its role in filling the gap in the literature of unit trust—stock markets nexus in Islamic finance; and its findings provide relevant information that can benefit investors and fund managers.
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Literature Review

In earlier study, (Bailey & Lim, 1992) investigated the correlation between country funds and foreign funds with the U.S. stock market. The result indicated the significant correlation between the return on country fund and US market index. Although the country funds have higher diversification level, the result revealed that the funds’ pricing are more reflected on domestic US stock rather than foreign equity portfolios.

In the case of Australia, (Allen & MacDonald, 1995) investigated the relationship of stock index with 15 countries from year 1971 to 1992 using cointegration test. The results presented that there is no cointegration between Australia market with markets in Belgium, Austria, Italy, Malaysia, Japan, USA, Spain, Norway, Sweden and Singapore. The findings suggested that investors in Australia could diversify their portfolio investment into these countries to gain more benefit.

The price linkages between country funds listed in New York Stock Exchange (NYSE) with market indices in Germany, Japan and UK from December 1987 to February 1990 was examined by (Ben-Zion, Choi, & Hauser, 1996). The study used cointegration test and revealed that ther country funds are not cointegrated with local market indices in the three countries tested. This suggested that country funds are not perfectly reflecting national markets in the long run. However, Granger causality test for short-run dynamic showed that interdependence relationship exists between the country funds and the local market indices except with US market index.

In Spain, (Matallin & Nieto, 2002) found out only 11 out of 63 unit trust funds have cointegration with local stock markets Ibex 35, over the period 1995 to 1998. This is because most of the funds have been manage through market timing and security selection which leads to deviate from market index over time. Moreover, (Chu, 2010) said that the actively managed funds must diversify their investments in order to meet legal requirements, cash reimbursements or new stock applications which may increase the possibility of lack cointegration.

Key Terms in this Chapter

Financial Crisis: is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value.

Islamic Unit Trusts: a group of specialized collective investment funds which offer investors the opportunity to invest in a diversified portfolio of securities that are managed and selected by professional portfolio managers in accordance to Shariah principles.

Islamic Stock Market: is where sharia-compliant stocks are traded.

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