1. Mohammad Irfan Research Scholar Department of Management Studies Department of Management Studies Central University Haryana, Mahendergarh, Haryana, India A Study of Islamic Stock Indices and Macroeconomic Variables

2. Recently, the researchers have focused their attention on the emerging financial market, especially Shariah Indices in India. Islamic stock markets have provided attractive investment opportunities to international investors, and have become investment emblem in the global financial markets. Return in Islamic stock market is high as compared to benchmark indices (Sensex and Nifty) in India. Today the information technology has bought the revolution in the field of Islamic research and innovation by providing the database and the various tools to analyze the data on various aspects of the economy. The combined effect of LPG policy and the information technology have converged the world into a single market. INTRODUCTIONINTRODUCTION

3. On other hand news of safety, liberal economic policies, robustness infrastructure by government leads to the favorable impact over the investment results. The relationship between macroeconomic variables and stock market has been discussed earlier by researchers, academician and practitioners (Kwon and Shin, 1999). At first instance stock market provides an investor an inflation free market and at the same time it contributes towards the development of the economy (Khil and Lee, 2000). S&P short list the companies which are suitable for being listed in index according to the Shariah law. Basically the objective of the Shariah index is the wealth maximization and economic growth. Shariah index has started from 2008 and start attracting the investors from 2009. INTRODUCTIONINTRODUCTION

4. The highest recorded annualized return of S&P BSE 500 Shariah was 49 percent in March, 2015 in comparison with benchmark indices (Sensex) 41 percent. Those Shariah Index are working under the supervision of Nifty, includes Nifty Shariah, CNX Shariah 500 and Shariah 25. Goldman Sachs has forecasted that Global Investment Bank, in 2035 India would be the third biggest economy of the world after US and China. INTRODUCTIONINTRODUCTION

5. OBJECTIVESOBJECTIVES To investigate the relationship of Islamic stock Indices and macroeconomic variables. To investigate the relationship of Islamic stock Indices and macroeconomic variables. Indices BSE Shariah Nifty Shariah Nifty Shariah 500 Nifty Shariah 25 CPI Money and supply Interest Rate Exchange Rate

6. Macroeconomic Variables This research study is carry forwarded to the macroeconomic which is dealing with performance, behavior, structure and decision making an economy as whole, rather than the individual market. This paper investigates only four major variables include consumer price index (CPI), Money supply (MON), interest rate (INT) and exchange rate (ER). A large number of studies have been conducted throughout the world on the linkage between macroeconomic fundamentals and stock market. This study is focused on the Islamic stock indices and macroeconomic variables. Islamic stock market is a emerging terms in India. There are several factors affecting the growth rate of Islamic stock market like government intervention, religious values, regulatory authorities, politics and many superstitious conditions. INTRODUCTIONINTRODUCTION

7. DATA ANALYSIS & INTERPRETATION Methodology  PP test (Phillips–Perron Test Statistic)  ADF test(Augmented Dickey–Fuller Test Statistic)  Johansen test co-integration  The Engle Granger test  The Vector Error Correction Mechanism (VECM)

8. In this study, daily returns, without any adjustment for dividends, has computed by using this formula: Rt = ln(Pt / Pt – 1)* 100 Rt = is the daily return at time t of the and Islamic Benchmark Indices (BSE Shariah, Nifty Sharah, Nifty Shariah25, Nifty Shariah 500) Pt = is the daily price in time period t. Pt-1 = is the daily price one period t-1. DATA ANALYSIS & INTERPRETATION

9. EMPIRICAL RESULTS Table 1: Descriptive Statistics Particulars BSE Shariah NIFTY Shariah CNX 500 Shariah Shariah 25 CPIINTMONEX Mean0.01100.01190.01460.01520.00740.00920.01080.0031 Median0.01110.01230.01690.01310.00620.00000.00920.0027 Maximum0.14060.16180.36800.16290.04470.25520.03030.0597 Minimum-0.0892-0.0907-0.3338-0.0828-0.0166-0.1933-0.0051-0.0564 Std. Dev.0.03690.04120.07560.04090.00920.07980.00790.0230 Skewness0.11680.45180.15200.53190.44190.45110.45830.1184 Kurtosis4.54614.772314.29765.02676.39594.75882.34283.2398 Jarque-Bera7.233011.708377.85915.49936.42711.55893.76290.3359 Probability0.02690.00290.00000.00040.00000.00310.15240.8454 Sum0.77760.84521.03501.07640.52670.65390.76480.2211 Sum Sq. Dev.0.09520.11910.40030.11730.00590.44600.00440.0369 Observations72

10. EMPIRICAL RESULTS Skewness of the distribution of all macroeconomic variables and Islamic capital market data are positively right skewed that means number of high values are more in comparison to low values in the time series data. The findings of kurtosis shows that all variable values are greater than 3 that means leptokurtic distribution, sharper than the normal distribution except the MON (Money & Supply) that is 2.3428, which is less than 3, that means MON data series have platykurtic distribution flatter than a normal distribution with a wider peak. The volatility of variables is in terms of standard deviation (SD) as percentage (%) of means highest in INT (7.9 percent) and lowest in CPI (0.9 percent), which means interest rate is highly volatile in comparison to all variables. As per Jarque-Bera statistics (JB-test), Islamic indices and macroeconomic variables (CPI, INT) are non-normal at the confidence interval of 95 percent, since probabilities are less than 0.05. So, it is also needed to convert the S&P BSE Shariah index series into the return series. But MON and ER probabilities are more than 0.05. So, JB statistic shows that series of MON and ER are about to the normal distribution.

11. EMPIRICAL RESULTS Table 2: Correlation Matrix Tables 2, Correlation matrix, April 2009 to March 2015. In which S&P BSE 500 Shariah Index and all NSE Shariah Indices are moderate downhill (negative), weak downhill (negative) linear relationship between both. But all NSE Shariah Indices have highly (positive) and moderate uphill (positive) relationship exists. CPI is one of the most important factors in this correlation matrix because CPI has the positive correlation with all Islamic stock indices. Particulars BSE Shariah NIFTY Shariah CNX 500 Shariah Shariah 25 CPIINTMONEX BSE Shariah 1 NIFTY Shariah -0.05651 CNX 500 Shariah -0.02600.53541 Shariah 25 -0.05860.97770.51501 CPI 0.12680.11780.13760.14361 INT -0.2063-0.0316-0.0884-0.0719-0.10861 MON -0.0500-0.0807-0.0381-0.06290.0409-0.01861 EX 0.0342-0.3771-0.2015-0.40400.06960.0777-0.17341

12. EMPIRICAL RESULTS Table 3: Unit Root Test on Variables PP test Unit root test, the values of PP test statistic, If the T-test statistic is more than critical values, then investigator can reject the null hypothesis and accept the alternative hypothesis. There are three assumptions to accept the PP test for the stationary. These assumptions are followed by the PP test. T- test Statistic is more than 1 percent, 5 percent and 10 percent level of critical value. P-value (Probability value) is less than 5%. And the coefficient should be negative. All these three assumptions are followed by Islamic Stock indices and macroeconomic variables. PP test has been checked in Model 1 (level) on intercept and trend & intercept. And also checked in Model 2 (1st difference) with intercept and trend & intercept both. So, that all variables time series are stationary, and to be use for the further test of statistic. MACRO LINKAGE PP TEST.xlsx MACRO LINKAGE PP TEST.xlsx

13. EMPIRICAL RESULTS Table 4: Unit Root Test on Variables ADF test The values of ADF test statistic, If the T-test statistic is more than critical values, then investigator can reject the null hypothesis and accept the alternative hypothesis. There are assumptions, which will be allowing the ADF test for the stationary. These assumptions should be followed by the ADF test. T-test Statistic is more than its tested critical value at 1%, 5% and 10% level of significance. P-value (Probability value) is less than 5 percent. And the coefficient should be negative. These assumptions are pursued by Indian Islamic Stock indexes and macroeconomic variables. This ADF test has been checked in Model 1 (level) on intercept and trend & intercept. And also checked in Model 2 (first difference) with intercept and trend & intercept both. So, that all variables time series are stationary, and to be use for the Johansen test of statistic. MACRO LINKAGE ADF.xls MACRO LINKAGE ADF.xls

14. EMPIRICAL RESULTS Table 5 a. Johansen’s Co-integration Test of BSE Shariah The Trace test also indicates that 2 Co-integration equations at 5 % level of significance, It shows long run equilibrium between Shariah Indices and selected Macro variables includes CPI, MON, IR and ER. The results of Max-Eigen statistic point out the rejection of null hypothesis at 0.05 critical values that shows there are no co-integration vector. Another way of S&P BSE 500 Shariah has long association with Marco variables. Max-Eigen Statistic also indicates, there is 1 Co-integration equation at 5 percent level of significance, it tells about long run stability between Indian Islamic capital market indices and selected Macro variables. Johansen Co-integration Test Statistic of BSE Shariah Index Trace Statistic Max-Eigen Statistic Hypothesized No. of CE(s) Eigen value Trace Statistic Critical Value 0.05 Prob.** Hypothesized No. of CE(s) Eigen value Max- Eigen Statistic Critical Value 0.05 Prob.** None *0.428287.956469.81890.0009None *0.428236.886333.87690.0212 At most 1 *0.321251.070147.85610.0242At most 10.321225.572427.58430.0885 At most 20.238025.497729.79710.1444At most 20.238017.942621.13160.1320 At most 30.09877.555215.49470.5141At most 30.09876.857714.26460.5061 At most 40.01050.69753.84150.4036At most 40.01050.69753.84150.4036

15. EMPIRICAL RESULTS Table 5 b. Johansen’s Co-integration Test of Nifty Shariah Summary results of Johansen Co-integration test, Nifty Shariah Index has long relationship with Macroeconomic variables. Trace statistic indicates that 4 co-integration equations at 0.05 levels of significance, it shows long run equilibrium between Nifty Sariah Index and selected Macro variables. The results of Max-Eigen statistic specify that the rejection of null hypothesis at 0.05 critical values i.e. represent there are no co- integration vector. Nifty Shariah Index has long relationship with Macroeconomic variables like, CPI, MON, INT and Johansen Co-integration Test of Statistic of Nifty Shariah Index Trace Statistic Max-Eigen Statistic Hypothesized No. of CE(s) Eigen value Trace Statistic Critical Value 0.05 Prob.** Hypothesized No. of CE(s) Eigen value Max- Eigen Statistic Critical Value 0.05 Prob.** None *0.402297.731869.81890.0001None *0.402233.962033.87690.0489 At most 1 *0.322163.769847.85610.0008At most 10.322125.661127.58430.0863 At most 2 *0.243738.108729.79710.0044At most 20.243718.431321.13160.1145 At most 3 *0.229319.677415.49470.0110At most 3 *0.229317.194214.26460.0167 At most 40.03692.48313.84150.1151At most 40.03692.48313.84150.1151

16. EMPIRICAL RESULTS Table 5 c. Johansen’s Co-integration Test of CNX 500 Shariah Johansen Co-integration Test Statistic of CNX 500 Shariah Trace Statistic Max-Eigen Statistic Hypothesized No. of CE(s) Eigen value Trace Statistic Critical Value 0.05 Prob.** Hypothesized No. of CE(s) Eigen value Max- Eigen Statistic Critical Value 0.05 Prob.** None *0.390894.353169.81890.0002None0.390832.715133.87690.0683 At most 1 *0.317561.638047.85610.0015At most 10.317525.210827.58430.0977 At most 2 *0.266436.427229.79710.0074At most 20.266420.443121.13160.0622 At most 3 *0.196815.984115.49470.0422At most 3 *0.196814.467814.26460.0464 At most 40.02271.51633.84150.2182At most 40.02271.51633.84150.2182 Trace test also indicates that 4 co-integration equations at 0.05 levels of significance, presents long run equilibrium between CNX 500 Shariah and selected Macro variables includes CPI, MON, IR and ER. The results of Max-Eigen statistic designate that the rejection of null hypothesis at 5 percent critical values. In other words, CNX 500 Shariah has long relationship with Marco variables.

17. EMPIRICAL RESULTS Table 5 d. Johansen’s Co-integration Test of Shariah 25 Trace test also indicates that 4 Co-integration equations at 0.05 levels of significance, it present the long run equilibrium between Shariah25 and selected Macroeconomic variables. The outcome of Max-Eigen statistic indicates that the accaptance of null hypothesis at 0.05 critical values, there are no co-integration vector, the Max-Eigen statistic less than the critical value of 5 percent level of significant, it tells about there is no long run equilibrium between Shariah25 and Macroeconomic variables. In this case Johansen co-integration statistic is going to in favor of trace statistic; In Trace test has 4 co-integration equations with 5% level of significant. Johansen Co-integration Test of Statistic of Shariah 25 Trace Statistic Max-Eigen Statistic Hypothesized No. of CE(s) Eigen value Trace Statistic Critical Value 0.05 Prob.** Hypothesized No. of CE(s) Eigen value Max- Eigen Statistic Critical Value 0.05 Prob.** None *0.394893.929269.81890.0002None0.394833.141033.87690.0610 At most 1 *0.308760.788147.85610.0019At most 10.308724.368027.58430.1224 At most 2 *0.260836.420129.79710.0075At most 20.260819.943921.13160.0726 At most 3 *0.190216.476215.49470.0355At most 30.190213.927514.26460.0564 At most 40.03792.54873.84150.1104At most 40.03792.54873.84150.1104

18. EMPIRICAL RESULTS ModelsEstimates of Normalized Co-integrating Coefficients After analysis of equations, BSE Shariah Index has only one co-integration with money & supply, because t-statistics of MON (26.31), which is greater than critical value (1.96 at 0.05 Levels of significance) it exposes that null hypothesis is rejected i.e. MON is Co- integrated to BSE Shariah Index. In CNX Shariah have two co-integration, because, t- statistics of CPI, MON (2.060, 10.692, respectively), which is > critical value (1.96 at 5% Level of significance) it tells about null hypothesis is rejected i.e. CPI, MON are co- integrated to CNX Shariah Index. Nifty Shariah have also t- statistic value more than critical value of CPI, Mon, i.e. (2.209, 10.122, respectively). That means Nifty Shariah Index have co-integrated with CPI, MON respectively. In the results of Shariah 25 is co- integrated with the MON. BSE Shariah = 0.290 - 0.978CPI + 1.35INT - 26.31MON - 0.669ER CNX Shariah = 0.109 + 2.060CPI + 0.365INT - 10.692MON - 1.719ER Nifty Shariah = 0.100 + 2.209CPI + 0.416INT - 10.122MON - 0.378ER Shariah 25 = 0.121 + 1.777CPI + 0.451INT - 11.557MON - 0.477ER

19. EMPIRICAL RESULTS Table 6: Pragmatic analysis of Vector Error Correction Mechanism (VECM) Coefficient should be negative it depicts that error correction rate of BSE Shariah index is (-0.0027) at 0.05 levels of significant which is following by MON (-0.0644). While CPI, INT and ER’s error correction rate arise (0.0252, 0.2675 & 0.0638 respectively) those are positive. R-square should be more than 60%, it shows model is good. VECM model is fitted R-square (64.77%) is best, F-statistic probability is less than 5% i.e. (0.000081). F-statistic is significant. The error correction rate of Nifty Shariah coefficient (-0.1390) is negative. R-square is 66.17% that means model is best fitted and next observation F-statistic is less than 5% significant. In the CNX Shariah coefficient (-0.0330) is negative and R-square is 73.27%, continuously F- statistic is less than 5% (0.000001) that means model is best fitted. In Shariah 25 coefficient (-0.1413) is negative, R-square is 65.31% and continuously watching F-statistics is less than 5% (0.000062) that means VECM is best fitted model for all Islamic Stock market Indices. VECM Complete.xls VECM Complete.xls

20. EMPIRICAL RESULTS Table 7: Paired Granger Causality Test The result of Granger causality test, it shows that there is uni- directional relationship between BSE Shariah and Nifty Shariah, BSE Shariah and Shariah 25, Shariah 25 and CNX Shariah, CNX Shraiah and ER, INT and CPI. There is bi-directional relationship between INT and MON in India. Granger table.xls

21. EMPIRICAL RESULTS Figure 1: Graphical Presentation of Islamic Stock Market Indices and Macroeconomic Variables

22. CONCLUSIONCONCLUSION The focus of this paper is to investigate the dynamic linkage between Indian Islamic stock market indices and macroeconomic variables including consumer price index (CPI), money & supply (MON), interest rate (INT) and exchange rate (ER). This study analyses the long run relationship between Islamic stock indices and macroeconomic variables using data from April 20009 to March 2015. ADF and PP test is allowing check the data stationary. Investigator has checked the data on level and first difference to check the time series data of stationary. There are two co-integration relationships between S&P BSE 500 Shariah Index and economic variables. Nifty Shariah Index has four co-integrating with macroeconomic variables. CNX 500 Shariah has four co-integrated with macro variables. Shariah 25 has also co-integration with macro-variables.

23. CONCLUSIONCONCLUSION It means that in long run movements Islamic stock indices are tied to the macroeconomic variables. The result of Granger causality test shows that there is uni-directional relationship between BSE Shariah and Nifty Shariah, BSE Shariah and Shariah 25, Shariah 25 and CNX Shariah, CNX Shraiah and ER, INT and CPI. This reveals that BSE Shariah index affect the Nifty Shariah and Shariah 25. It is also seen that BSE Shariah index can be used as leading indicator for change in exchange rate and interest rate. It is observed that bi-directional relationship between INT and MON in India, not only in the BSE Shariah Index but also in Nifty Shariah, CNX Shariah and Shraiah 25 respectively.

24. CONCLUSIONCONCLUSION The present study is limited to only four selected macroeconomic variables. Inclusion of more variables with a longer time period may improve the results. A logical extension of the study can be done by including more variables and different types of Islamic stock indices. India is secular country, where lives several religion and communities peoples. They all are having different mindset and different believes of investment. Shariah law is gives the ethical investment direction which is not only followed by Muslim investors but also for the Non-Muslim investors as well. Islamic finance is contributing to the growth of worldwide economy. Islamic finance will be the potential future of world economy because Islamic capital market works with financial ethics and social justice. Opportunities are unloacking in Islamic microfinance, Islamic insurance, Islamic bond market and Islamic banking in India.