Causality among Stock Market and Macroeconomic Factors: A Comparison of Conventional and Islamic Stocks

Muhammad Hanif & Arshad Ali Bhatti
Published Online: December 2018

A recent development in financial markets is the creation of Sharīʿah compliant stock universes. Sharīʿah compliant stock universe is featured as socially responsible investments, less levered, and more reflective of the real sector. This study is conducted to understand and document the short-run equilibrium among important macroeconomic indicators and Equity indexes—Islamic and conventional—in the post-Sharīʿah-screening era in Pakistan. Comparative study of linkages among stock indexes and macroeconomic variables is of great interest to i) identify the important macroeconomic factors; and ii) document whether Sharīʿah screening of stocks has created any difference (in macro risk factors). We have included eight macroeconomic variables to study integration with stocks for 64 Months’ period (07/2011-10/2016). Evidence has been obtained by application of correlation, unit root, OLS-regression and Granger causality tests. Findings suggest that both markets—Islamic & conventional—are integrated with selected macroeconomic indicators. However, evidence lacks the integration of markets themselves. We identify a set of two variables from real economy—exports and workers’ remittances—linked with both markets, while the third variable is different for Islamic (industrial production) and conventional (money supply) markets. Important monetary variables—interest rate and inflation—have shown an insignificant association. Movements of Islamic index are in-line with the theory i.e. disassociation from interest and reflection of the real economy. Movements of conventional index cover both real and monetary sectors.


Sharīʿah index, macroeconomic variables, Arbitrage Pricing Theory (APT), Karachi Stock Exchange (KSE), Islamic capital market, Pakistan.