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Monetary transmissions mechanism for Islamic capital markets: evidence from Markov switching dynamic regression approach

Author

Listed:
  • Zaheer Anwer
  • Ahmed Sabit
  • M. Kabir Hassan
  • Andrea Paltrinieri

Abstract

Purpose - This study akims to investigate the effectiveness of expansionary monetary policy for Islamic capital markets by studying the impact of decrease in policy rates on seven Islamic equity indices for the period 1996–2019. The transmission mechanism may be different for sampled indices, as they are exposed to Shariah screening that discards certain business sectors and puts limit on debt in capital structure. Design/methodology/approach - This study uses Markov Switching dynamic regression approach of Hamilton (1988). Findings - The results show little effectiveness of expansionary monetary policy in both Bear and Bull states, for most of the sample indices. Originality/value - To the best of the authors’ knowledge, no study has made use of dynamic models to assess the association between monetary policy rate and Islamic index prices. Similarly, the authors found no work exploring the effectiveness of expansionary monetary policy actions in different regime for Islamic Indices. This investigation is important in unraveling whether, in the presence of limitations on selection of business activity and choice of capital structure, monetary policy can change the market sentiment, or it will be ineffective. The present study fills this gap.

Suggested Citation

  • Zaheer Anwer & Ahmed Sabit & M. Kabir Hassan & Andrea Paltrinieri, 2022. "Monetary transmissions mechanism for Islamic capital markets: evidence from Markov switching dynamic regression approach," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing Limited, vol. 16(3), pages 448-463, September.
    • Handle: RePEc:eme:imefmp:imefm-05-2022-0203
    DOI: 10.1108/IMEFM-05-2022-0203
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    More about this item

    Keywords

    Islamic finance; Monetary policy; Markov switching; Islamic capital markets; Policy rate; C24; E52;
    All these keywords.

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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