The Relationship Between Monetary Policy And Islamic Stock Market

This article analyses short run and long run dynamics between monetary policy and Islamic stock market in Malaysia during January 1992 until April 2004. The focus of the paper is to empirically investigate the link between the monetary policy variables and the mean of stock returns. In the analysis, we adopt the standard cointegration, causality tests and error correction models. The monetary policy variables chosen in the study are: money supply M1, M2 and M3, Treasury bill rate and real effective exchange rate. In order to examine the international influence on the Malaysian Islamic Stock Market, we also incorporate the US monetary variables as measured by the federal funds rate while the Islamic Stock Market is represented by the RHB Islamic Index. By analyzing the interactions between the monetary policy variables and the Islamic index, we discover that the Islamic index performance is as good as the conventional index performance in Malaysia.