INTRODUCTION
ASSESSING THE ASYMMETRIC IMPACT OF OIL PRICE ON ISLAMIC STOCKS IN MALAYSIA:
NEW EVIDENCE FROM NON-LINEAR ARDL
JMFIR Vol. 13/No.2 DECEMBER 2016
This paper examines the asymmetric impact of oil price on Malaysian Islamic stocks.
Using non-linear ARDL cointegration methodology, the paper finds evidence suggesting that ignoring the intrinsic nonlinearities may lead to misleading inference. In particular, the results reveal significant differences in the response of Islamic stocks to positive or negative changes of the oil price in both the long- and short-run time horizons. Therefore, the use of the asymmetric ARDL model contri- butes to the understanding of the nonlinear dynamics between oil price and Islamic stocks. This result leads to more efficient investment decision for investors and other market participants, by managing their investments and minimize their portfolio risks. Investors should respond asymmetri- cally to the increase and decrease of oil price when investing Islamic stocks in Malaysia.
Keywords: Islamic stocks; oil price;
non-linear ARDL
Over the years, the impact of oil price on economic activities has attracted a con- siderable amount of work in the economic literature (see Hooker, 2002; Hamilton, 2003; Counado & Perez de Garcia, 2005;
Kilian, 2008a, 2008b; Kilian & Vigfusson, 2011; Sukcharoen et al., 2014; Bouri, 2015;
ABSTRACT
RAMEZ ABUBAKR BADEEB HOOI HOOI LEAN Universiti Sains Malaysia
Chou & Tseng, 2016). The focus of these studies ranges from variables such as inflation, interest rate and exchange rate to stock prices. One would expect that the changes in oil price relate to the changes in economic activities, as a result of the importance of oil to the economy. As stock market is considered a crucial building block for a healthy economy, a large body of literature examines the impacts of oil price shocks on stock markets (Jones & Kaul, 1996; Driesprong et al., 2008; Creti et al., 2014; Sukcharoen et al., 2014; Bouri, 2015; Chou & Tseng, 2016). These studies indicate different effects of oil price changes on stock market activities, suggesting that the effects differ between oil-exporting and oil-importing countries (Creti et al., 2014).
While there is a consensus on the existence of a positive relationship between oil shocks and stock prices in oil-exporting countries (Kilian & Park, 2009), this relationship is mixed in purely oil-importing countries.
Many studies on oil price modeling have been conducted in a linear framework.
Nevertheless, economic variables incorpo- rate nonlinear properties especially in the area of business cycles (Neftci, 1984; Falk, 1986). Therefore, nonlinearity in the oil- stock market relationships may appear when stock prices respond differently to changes in oil price during boom and re- cession. This phenomenon possibly implies that linear models may not be appropriate to explore the determinants of stock prices
2 Price asymmetry refers to the differences in magnitude and interval adjustments in product prices subsequent to positive or negative cost shocks (e.g., high (low) increases and low (high) reductions or rapid (slow) increases and slow (rapid) reductions) (Chou & Tseng, 2016).
3 Time horizon is the length of time over which an investment is made or held before it is liquidated.
Time horizon can range from seconds, in the case of a day trader, all the way up to decades for a buy-and-hold investor.
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and could provide misleading results. To solve this problem, some studies examine whether the asymmetric effect of oil price2 exists in stock markets (Sadorsky, 1999;
Basher & Sadorsky, 2006; Perdiguero- García, 2013; Salisu & Oloko, 2015). The logic of considering non-linear effect comes from the fact that there are a variety of stakeholders with markedly different in- vestment horizons (see Reboredo & Rivera- Castro, 2014). Market gathers all investors from various time horizons3, which means that all investment classes may exert different influences on the entire market.
Sadorsky (1999) proves the asymmetric effect of oil price on the stock price using the vector auto-regress model. Basher &
Sadorsky (2006) later confirm these phenomena for emerging countries. Salisu
& Oloko (2015) pronounce a significant asymmetric impact during the world economic slowdown period. In contrast, Cong et al. (2008) find minimal evidence for an asymmetric effect of oil price on the aggregated Chinese stock market.
However, the works by Nandha & Raff (2008) and Park & Rattii (2008) report that no asymmetric issues with a larger data sample, and they recommend hedging the oil price risk. Due to the reputedly complicated oil and stock markets as well as the influences of many exogenous factors, such as policy changes, new technology im- provement and environmental concerns, the oil-stock issue is highly complex and it is difficult to attain a conclusive result. There- fore, by involving more nonlinear considera-
tions, Ramos & Veiga (2013) show evidence that the asymmetric effect is solely signifi- cant for oil-importing when the distinction among countries and oil volatility are con- sidered; this proves that more elaborated examinations involving nonlinear factors could offer more convincing results.
One important deficit has been indicated from the existing studies when examining the relationship between oil price and stock price; that these studies mainly concen- trated on the conventional stock markets and ignored the Islamic stock markets.
The investigation of such relationship is thus interesting because Islamic stock markets have recently become attractive due to the innovation and rapid expansion of Islamic finance, as well as global investors seeking for new international diversification destinations (Kamarudin & Masih, 2015).
Therefore, in contrast to prior studies, this paper explores whether the asymmetric effect of oil price exists in Islamic stocks taking an example of Malaysia. Contribu- tion of this paper is twofold: First, we make a first attempt to investigate the asymmetric impact of oil price on Islamic stocks in Malaysia. Second, the study builds upon the recent contribution of Lamotte et al. (2013), Atil et al. (2014), and Shin et al. (2011;
2014) by employing alternative econometric framework, namely the nonlinear auto- regressive distributed lags (NARDL). To the best of our knowledge, this could be the first to employ NARDL on the relationship between oil price and stock price.
ASSESSING THE ASYMMETRIC IMPACT OF OIL PRICE ON ISLAMIC STOCKS IN MALAYSIA: NEW EVIDENCE FROM NON-LINEAR ARDL The Islamic stocks can be considered as
one of the important branches of the Islamic capital market where its compo- nents and activities are based on Islamic Law. It has been established based on five main principles of operation: preventing any practice of usury, sharing risks, preventing widespread speculation, compliance of the akad with the stated contract and the activity implemented must be legal in the Syariah aspect (Hussin et al., 2012).
In the latest development, Bursa Malaysia, in co-operation with Financial Time Stock Exchange (FTSE), introduced a new series of tradable equity indices called FTSE-Bursa Malaysia Emas Shariah Index and FTSE- Bursa Malaysia Hijrah Shariah Index. This development helps to create more oppor- tunities for investors seeking Shariah invest- ments to benchmark their portfolios, and the asset managers to create new products serving the investment community.
Methodology
In the traditional cointegration approach, the dependent variable is expected to respond the same to both increases and decreases of each independent variable.
The linear UECM specification without asymmetric adjustment in the short and long run is written as follows:
where SP is the Islamic Stock Index, OIL is oil price and IPI is the industrial production index.
To account for asymmetries, Shin et al.
(2014) introduce the NARDL model where NARDL can analyze both the long term
and short term relationships along with the presence of any asymmetry of non- stationary variables in a single equation.
Most of the price series are usually non- stationary, therefore, NARDL is found to be suitable for exploring and establishing the relationship among international crude oil prices.
The remainder of this study is structured as follows: Section 2 introduces the development of stock market in Malaysia;
Section 3 explains the methodology and data sources; Section 4 presents the em- pirical findings and discussion. Section 5 provides a conclusion.
The Development of Stock Market in Malaysia
Malaysian stock market is one of the most prominent emerging markets in the region.
The Malaysian Stock Exchange was initially set up in March 1960, and public trading of stocks and shares commenced in May 1960. The Capital Issues Committee (CIC) was established in 1968 to supervise the issue of shares and other securities by companies applying for listing or already listed on the Exchange. Following the termination of the interchangeability with Singapore and the floating of Malaysian Ringgit, Malaysian Stock Exchange was separated into Kuala Lumpur Stock Exchange (KLSE) and Stock Exchange of Singapore (SES) in 1973.
In 1992, the Islamic Capital Market (ICM) was introduced in Malaysia. Its existence is reflected by the presence of Islamic stock- broking operations which included Islamic indices, Islamic unit trusts, and a list of permissible counters in the KLSE as issued by the Securities Commission (SC).
METHODOLOGY AND DATA
(1)
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OIL is decomposed into its positive and negative partial sums, OIL+ and OIL-
Accordingly, we obtain the following asymmetric error correction model (AECM)4:
where all variables are as defined above, p, q and r are the lag orders, β1 = α2+/-α1, β2 = α2-/-α1. The cointegration test applies on the unrestricted model is an F-test on the joint hypothesis that the coefficients of
the lagged level variables are jointly equal to zero. Our analysis will be based on two models, the first is constructed for WTI as the first proxy of oil price and Brent crude oil as the second proxy.
Data
Our data consist of monthly data of Bursa Malaysia Shariah Index (Hijrah), oil price, and industrial production index. For oil price, West Texas Intermediate (WTI) crude oil price and Brent crude oil spot prices were measured in Ringgit. According to Counado & de Gracia (2005) and Ibrahim (2015), the inflationary effect of oil price hikes is more prevalent when the oil price is expressed in domestic currencies for Asian countries. All data were collected from DataStream with a sample period from March 2007 to December 2015.
Time series plots of the variables and their descriptive statisticsare shown in Figure 1 and Table 1 respectively.
(2) and
4 For a more, extensive derivation of the model see Shin et al. (2011).
(3)
Table 1:
Descriptive statistics
4.665 0.081 0.192 2.557 1.531 0.465 9.303
0.222 -0.413 2.445 4.412 0.110
4.383 0.285 -0.835
2.934 12.447
0.002
4.440 0.320 -0.782
2.671 11.398
0.003
IPI OilBrent
OilWTI SP
Mean Std. Dev.
Skewness Kurtosis Jarque-Bera Probability
JMFIR Vol. 13/No.2 DECEMBER 2016 To examine stationarity of variables, the
conventional Augmented Dickey–Fuller (ADF) and Phillips and Perron (PP) tests are commonly utilized. However, these tests lack power in the presence of structural breaks in the series. In parti- cular, they may fail to reject the null hypothesis of a unit root when structural breaks are present (see, for example, Perron, 1989; Zivot & Andrews, 1992).
Figure 1:
Time series plots of the variables LSP
8.6 8.8 9.0 9.2 9.4 9.6 9.8
07 08 09 10 11 12 13 14 15
LBRT
3.50 3.75 4.00 4.25 4.50 4.75 5.00
07 08 09 10 11 12 13 14 15
3.6 4.0 4.4 4.8 5.2
07 08 09 10 11 12 13 14 15
LWTI
07 08 09 10 11 12 13 14 15
4.4 4.5 4.6 4.7 4.8 4.9
LIPI
To account for this possibility, we applied Zivot & Andrews (1992) unit root test that allows for a single endogenously determined structural break. We then took the encountered break point and added a dummy variable into our models to capture the structural break in the estimation. Overall, the results of unit root tests reported in Table 2 show that the variables are stationary in their first differences but non- stationary in their levels.
EMPIRICAL RESULTS
24
Having established that none of the variables was integrated of order 2, we proceeded to estimate the ARDL model. As a benchmark, we first carried out the analysis using the linear ARDL model.
The result of Table 3 reveals that the variables in the linear models 1 and 2 were not cointegrated since F-statistics was lower than the lower bound critical values at 10%.
Moreover, the positive sign of the coefficients of error correction term in linear ARDL model confirmed that the linear approach was not appropriate to uncover the relationship between the variables. However, when the non-linear ARDL models were introduced, both models were found to be cointegrated at 5% level of significance.
The results of long run analysis presented in Table 4 provided more evidence about non linearity relationship of the variables. The long run impacts of oil price on Islamic
Table 2:
Results of unit root tests
SP OILwti OILBrent IPI
-8.5144***
-6.8928***
-7.5457***
-15.2161***
1st Differences Level
3.6354 (2011:10)
-3.8817 (2014:8) -3.8335 (2010:9) -5.9877 (2008:9) -8.5139***
-6.9568***
-7.5457***
-15.1241***
-1.6113 -2.4783 -1.5213 -0.7564 -1.4330
-3.2896 -1.2464 -0.5873
ZA PP
ADF ADFPP
Note: *** denotes the significance at 1% level.
Table 3:
Results of ARDL and NARDL cointegration tests
Optimal lag F-statistic ECt-1
Critical Values Lower Bound Upper Bound
(7,5,10,5) 5.3820**
-0.2868***
NARDL ARDL
(8,7,1,4) 5.8660**
-0.3169***
(2,10,4) 0.8012 0.0831***
(1,1,4) 1.9762 0.0457***
1% level 5.407 6.783
5 % level 3.940 5.043
10% level 3.260 4.247
Model 2 Model 1
Model 1
Equation Model 2
Note: *** and ** denotes the significance at 1 % and 5 % level respectively. Critical values bounds are from Pesaran et al. (2001) with unrestricted intercept and no trend.
ASSESSING THE ASYMMETRIC IMPACT OF OIL PRICE ON ISLAMIC STOCKS IN MALAYSIA: NEW EVIDENCE FROM NON-LINEAR ARDL stocks reacted more positively than when the oil price declined.
The result also indicates that there was short-run rigidity in the Malaysian Islamic stocks against oil price drop.
However, as shown in Model 1, when the oil price rose, the impact was significantly positive.
The reason behind these results can be attributed to investors’ reaction. Increase in the oil price, on one hand, improves the expectation regarding future eco- nomic activities which motivates investors to pump more cash flow in the market.
However, on the other hand, the conser- vative investment behavior arises when oil price decreases which keep its rigidity in the short run before it is pushed downward when the investors anticipate future liquidity constraints.
Finally, the coefficients of the estimated lagged error correction term were nega- tive and significant in the non linear models. This confirms the existence of a long-run relation among the variables.
In addition, the coefficient suggests that a deviation from the long-run equili- brium following a shock was corrected by approximately 28% and 32%, res- pectively.
Panel C in the same table notes that all models passed all diagnostic tests for serial correlation, autoregressive condi- tional heteroscedasticity and model speci- fication. The CUSUMSQ plots in Figure 2 remained within the critical boundaries for the 5% significance level. These statistics confirm that the long-run coeffi- cients and all short-run coefficients in the error correction model were stable.
stock index was absent in the two linear ARDL models. The significant impact of oil shock in the long run has only appeared in the nonlinear ARDL models. The increase of oil price has a positive impact on the Islamic stock index where a 10% increase in oil price (WTI), increased the index by 4%. Similarly, a 10% increase in oil price (Brent), increased the index by 2%. However, when oil price decreased by 10%, the stock index decreased by only 2% or it was not significantly affected by Brent crude oil.
Increase in the oil price, on one hand, improves the expectation regarding future economic activities which motivates investors to pump more cash flow in the market. However, on the other hand, the conservative investment behavior arises when oil price decreases which keep its rigidity in the short run before it is pushed downward when the investors anticipate future liquidity constraints.
The Islamic stock index was not affected at the same level when the oil price decreased compared to the oil price increase. When oil price rose, the Islamic
26
Table 4:
Long run and short run analysis
NARDL ARDL
Panel A. Long Run Results
Panel B. Short Run Results
Note: ***, **,* denotes the significance at 1%, 5% and 10% levels respectively. t-statistic is in parenthesis, P-value is in brackets.
Model (2) Model (1)
Model (1) Model (1)
C OIL OIL+ OIL- IPI Dum2011:10
0.3736 (0.2957)
- 0.1517**
(2.4947) 0.0712 1.1960) 1.8968***
(6.8616) 0.0032 (0.0307) 4.1593
(1.5697) - 0.4043***
(3.7676) 0.1932**
(2.0564) 1.0167*
(1.7296) 0.0412 (0.3758)
BRENT WTI
-10.3495 (-1.6582) 0.1141 (0.3352)
- - 4.0712***
(2.8014) -0.6930 (-0.8156)
BRENT -14.5235
(-1.2636) 1.0023 (1.1105)
- - 3.8860**
(2.3969) -0.2154 (-0.2650)
Panel C Diagnostic Tests
∆OIL
∆OIL+
∆OIL-
∆IPI
DUM2011:10 ECt-1
- 0.0480 (1.5176)
0.0225 (0.9075)
-0.4309 (-1.0950)
-0.0066 (-0.2982) -0.3169***
(-5.6430) -
0.1160**
(2.3816) 0.0572 (1.4213)
-0.7708 (1.0496) 0.0150 (0.7076) -0.2868***
(-5.4590) 0.0104***
(2.3984) - - -0.2832 (-2.0700)
0.0096 (0.4029) 0.0832***
(2.9563) 0.1449***
(3.1879) - - -0.1728 (-1.2823)
-0.0084 (-0.3442) 0.0457***
(2.9503)
LM ARCH RESET
2.0251 [0.1395]
1.8367 [0.1786]
0.0784 [0.9377]
0.7566 [0.4736]
0.1257 [0.7238]
0.3029 [0.7363]
1.4970 [0.2305]
0.0174 [0.8952]
2.5481 [0.1146]
1.1755 [0.3134]
0.1176 [0.7324]
0.0122 [0.9124]
WTI OIL
F-Statistic F-Statistic
F-Statistic F-Statistic
Test
JMFIR Vol. 13/No.2 DECEMBER 2016 We investigate the links between oil price
and Islamic stocks price using monthly data for the period March 2007-December 2015. In particular, we focus on the linkages between oil and stock prices in both the long-run and short-run horizons under both the linear and nonlinear frame- works. We find the presence of non-linear relationship between oil price and Islamic stock index in Malaysia. The Islamic stocks react more positively when the oil price rises than when the oil price declines.
We conclude that the imposition of a linear symmetric model could be mis- leading in ex-plaining the relationship between oil price and Islamic stocks in Malaysia. The long run effect of oil price on Islamic stocks did not appear in the symmetric models. However, the asym-
Figure 2:
Plots of cumulative sum of squares of recursive residuals
2012 2013 2014 2015
IV I II III IV I II III IV I II III IV I II III IV -0.4
-0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4
2012 2013 2014 2015
IV I II III IV I II III IV I II III IV I II III IV -0.4
-0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4
-0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4
IV I II III IV I II III IV I II III IV I II III IV
2012 2013 2014 2015
IV I II III IV I II III IV I II III IV I II III IV
2012 2013 2014 2015
-0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4
CUSUM of Squares 5% Significance
metric models reveal the presence of such relationship. Therefore, the use of the asymmetric ARDL model contributes to the understanding of the nonlinear dynamics between oil price and Islamic stocks in Malaysia.
Our results reinforce the related literature in showing that oil price and stock price are rather interactive in a nonlinear manner.
This finding leads to a more efficient in- vestment decision for investors and other market participants, such as financial managers, analysts and firms in managing their investments and minimizing their portfolio risks. Investors should respond asymmetrically to the increase and decrease of oil price when investing Islamic stocks in Malaysia. Moreover, model builders should construct nonlinear models that accom- modate asymmetry in the oil market.
CONCLUSION
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Received Date: 6th June 2016 Acceptance Date: 26th August 2016
