Do Islamic Stocks Reinforce Real Economic Activity? Evidence from an Emerging Islamic Capital Market

Abstract

The principles of Islamic moral economy encourage real economic activity and asset driven financing model. Accordingly, the study examines the dynamic association between Islamic stocks and real economic activity in an emerging Islamic capital market. The study employs various robust time series methods to unveil the relationship between Islamic stocks and real economic activity. Moreover, in the presence of other well-known predictors of economic activity like, conventional stock index, interest rate and exchange rate, the study finds bidirectional causal relationship between Islamic Shariah-compliant stock index and real economic activity in Pakistan Stock Exchange (PSX). The findings of the study reinforce the notion that the development of the Islamic capital market leads to an augmented level of real economic activity.