Islamic equity market and macroeconomic variables: evidence from the UK

The recent turbulent environment in the UK has given rise to Islamic finance as an alternative diversification investment class. Linked to this fact we tend to investigate the relationship of UK Islamic stock market with the given set of macroeconomic variables. Quarterly data are obtained for GDP, Dow Jones Islamic UK (DJIUK), Exchange rate, Interest rate and CPI. Due to the lack of empirically proven Islamic market theories, time series techniques have been applied to gauge the long run relation and causality between the variables. Using Johansen and ARDL tests we confirm the cointegration between the variables. Interest rate is the weakest variable due to the equity capital structure of Islamic stock and sector weightage of Dow Jones Islamic UK. GDP is found to be the leader, as equity markets respond to GDP movement more than conventional bond market and given the fact that Islamic stocks are based on equity relationship, policymakers should always strive to maintain a stable GDP. This research hopes to contribute to the existing framework of Islamic financial stock market used by asset managers and policy makers