Causality linkages between USA and Asian Islamic stock markets

Abstract

In earlier studies on co-movement of stock markets focused mainly on conventional equity markets. In contrast to previous studies, this research investigated on co-movement of Islamic equity markets. Emphasis was placed on two questions: do the Islamic stock markets in Asia and US move together and what will be the directions of the movements? The data are obtained from Morgan Stanley Capital International (MSCI) of daily indices of sixteen equity markets, for the period between August 2004 to December 2008. The study uses correlation analysis, Augmented Dickey Fuller, unit root test and Granger causality test. The results revealed: (1) more than half of the Islamic equity markets in Asia and US are significantly and positively correlated, implying there are potentials for diversification especially those markets that have low correlation values, (2) the unit root test indicated that Islamic equity markets are stationary, and (3) Granger causality indicated that 23 percent of the Islamic equity markets of Asia and US are bidirectional causality, 53 percent are unidirectional causality and 24 percent have showed no causality.