FTSE BURSA MALAYSIA HIJRAH SHARIAH INDEX AND UNCERTAINTY INDEX: EVIDENCE FROM AUTOREGRESSIVE DISTRIBUTED LAG (ARDL) MODEL AND THEIL’S INEQUALITY COEFFICIENT

Abstract

The performance of financial markets is influenced by a myriad of factors and one of them is uncertainty. Uncertainty is said to be a great predictor of both the returns and volatility of financial market instruments. In this study we examined the long run cointegration of two uncertainty indexes namely the Global Economic Policy Uncertainty (GEPU) and Geopolitical Risk (GPR) on the returns of FTSE Bursa Malaysia Hijrah Shariah Index (FBM HS) for the period January 2000 to December 2022. The Auto Regressive Distributed Lag (ARDL) approach was employed to analyze the possible long run cointegration between the uncertainty indexes and the Islamic stock index return. Our findings revealed that the GEPU index have a significant negative on the returns of FBM HS over the long run whilst GPR’s impact on FBM HS was found to be insignificant. Our results via Theil’s Inequality Coefficient revealed GEPU as the better predictor compared to GPR in terms of predicting the returns of FBM HS. The findings strongly advice those who are in the investment ecosystem especially investment managers and investors in the Malaysian markets to closely monitor GEPU and GPR to manage return risks effectively. Policymakers are also urged to pay a careful attention to uncertainty measures as they significantly influence the returns of FBM HS.