The Link between Gold Price, Oil Price and Islamic Stock Market: Experience from Malaysia

Abstract:

This research will focus on the relationship between strategic commodities (namely oil and gold prices) and the Islamic stock market in Malaysia. The objective of this research is to analyze the dynamic effects of oil price and gold price changes on the Islamic stock market in Malaysia using an estimation of the Vector Auto Regression (VAR) method. The variables involved in this research are Crude Oil Price (COP), Kijang Gold Price (KGP), and FTSE Bursa Malaysia Emas Shariah Index (FBMES). Using data covering the period from January 2007 to December 2011, the study applies the co-integration analysis, Granger causality test, Impulse Response Function (IRF) and Variance Decomposition (VDC) analysis. The findings show that Islamic stock returns were not co-integrated with strategic commodities in the long run. From the Granger causality viewpoint, it was observed that there was a bi-directional causality relationship between Islamic stock returns with oil prices. On the other hand, the FBMES was not affected by the gold prices or vice versa. Therefore, it can be concluded that, among strategic commodities, only oil's price variables will affect the Islamic stock return in the short run in Malaysia. This proves that the Kijang Gold Price is not a valid variable for the purpose of predicting changes in Islamic share prices.