Impact of exchange rate and oil price on the yield of sovereign bond and sukuk: Evidence from Malaysian capital market

Authors

  • Huda Arshad Arshad Ayub Graduate Business School, Universiti Teknologi MARA Shah Alam, Malaysia
  • Ruhaini Muda Accounting Research Institute, Universiti Teknologi MARA Shah Alam, Malaysia
  • Ismah Osman Faculty of Business and Management, Universiti Teknologi MARA, Shah Alam, Malaysia

DOI:

https://doi.org/10.24191/jeeir.v5i1.6313

Keywords:

Exchange rate, Oil price, Bond, Sukuk

Abstract

This study analyses the impact of exchange rate and oil prices on the yield of sovereign bond and sukuk for Malaysian capital market. This study aims to ascertain the effect of weakening Malaysian Ringgit and declining of crude oil price on the fixed income investors in the emerging capital market. This study utilises daily time series data of Malaysian exchange rate, oil price and the yield of Malaysian sovereign bond and sukuk from year 2006 until 2015. The findings show that the weakening of exchange rate and oil prices contribute different impacts in the short and long run. In the short run, the exchange rate and oil prices does not have a direct relation with the yield of sovereign bond and sukuk. However, in the long run, the result reveals that there is a significant relationship between exchange rate and oil prices on the yield of sovereign bond and sukuk. It is evident that only a unidirectional causality relation is present between exchange rate and oil price towards selected yield of Malaysian sovereign bond and sukuk. This study provides numerical and empirical insights on issues relating to capital market that supports public authorities and private institutions on their decision and policymaking process.

References

Ahmad, W. and Radzi, R.M. (2011). Sustainability of Sukuk and Conventional Bond during Financial Crisis: Malaysia’s Capital Market, Global Economy and Finance Journal, vol. 4, no. 2, 3345.

Agrawal. G (2010). “A Study of Exchange Rates Movement and Stock Market Volatility”, International Journal of Business and Management, vol. 5, no. 12, 62-73.

Aloui, C, Nguyen, DK, & Njeh, H (2012). “Assessing the impact of Oil Price Fluctuations on Stock Returns in Emerging Markets”, Economic Modelling, vol. 29, no. 6, 2686-2695.

Arouri, M & Fouquau, J (2009). “On the short-term influence of oil price changes on stock markets in GCC countries: linear and nonlinear analyses”, Economics Bulletin, vol. 29, no. 2, 795-804.

Awaluddin. F. & Masih. A. M. (2015). Sukuk Pricing Dynamics-Factors influencing Yield Curve onthe Malaysian Sukuk. MPRA paper, no 66355.

Banerji, S., Ventouri, A. & Wang, Z. (2014). The Sovereign spreads in Asian emerging economies:

The significance of external versus internal factors. Economic Modelling, vol. 36, 566-576.

Boey, K. Y. (2012). So Strong on sukuk. IFR Asia. Debt Capital Market. Retrieved from

http://www.ifrasia.com/so-strong-on-sukuk/21032669.fullarticle

Frankel, J., Smit, B. and Sturzenegger, F. (2008). South Africa: Macroeconomic challenges after decade of success. Economics of Transition, vol. 16, 639–677

Gadanecz, B., Miyajima, K., Shu, C. (2014). Exchange rate risk and local currency sovereign bond yields in emerging markets. BIS Working Study, 474.

Hasan. M. E. (2010). Behavioral approach to Arbitrage Pricing Theory (No.26343). University Library of Munich, Germany

Ho, SH (2015). “Long and Short-runs determinants of the sovereign CDS spread in emerging countries”, Research in International Business and Finance, vol. 36, 579-590.

Hsing. Y (2015). “Determinants of the Government Bond Yield in Spain: A Loanable funds model”, International Journal of Financial Studies, vol. 3, 342-350.

Imarhiagbe. S. (2010). Impact of Oil Prices on Stock Markets: Empirical Evidence from Selected Major Oil Producing and Consuming Countries. Global Journal of Finance and Banking, vol. 4, no. 4, 1531.

Jahjah, S,Wei, B & Yue, VZ, (2012). “Exchange Rate Policy and Sovereign Bond Spreads inDeveloping Countries”, International Finance Discussion Study, no. 1049.

Jaupllari, S & Zoto, O. (2013). “An Assessment of Demand for Imports through the VECM Model”, Journal of Knowledge Management Economics and Information Technology and Information Technology, vol. 3, no. 6, 1-17.

Jecheche, P. (2011). An Empirical Investigation of Arbitrage Pricing Theory: A case Zimbabwe. Journal of Comprehensive Research.

Kang, W, Ratti, RA & Yoon, KH (2014). “The Impact of Oil Price Shock on U.S. Bond Market Returns”, Energy Economics, vol. 44, 248-258.

Miller, JI & Ratti, RA (2009). “Crude Oil and Stock Markets: Stability, Instability and Bubbles”, Energy Economics, vol. 3, no. 4, 559-568.

Mukhtar, T & Rasheed, S (2010). “Testing Long Run Relationship between Exports and Imports: Evidence from Pakistan”, Journal of Economic Cooperation and Development, vol.31, no. 1, 4158.

Papapetrou, E (2001). “Oil Price Shocks, Stock Market, Economic Activity and Employment Greece”, Energy Economics, vol. 23, no. 5, 511-532.

Pericoli, M & Taboga, M (2012). “Bond Risk Premia, Macroeconomic Fundamentals and the Exchange rate”, International Review of Economics and Finance, vol. 22, 42-65.

Rahman. M (2009). “Time Series Evidence on U.S. 10-Year T-Bonds, 3-Month T Bills and the External Value ofDollar”, An International Journal of Business & Economics, vol. 5, no.1, 5157.

Ramanathan, S, Crude Can Be Cruel-Redux of 1985-86? (January 2016). Starbizweek.

Ravischandran, K (2010). “Impact of Oil Prices on GCC Stock Market. Research in Applied Economics”, vol. 20, no.1, 212.

Robert F. Engle and C. W. J. Granger (1987), “Co-Integration and Error Correction: Representation Estimation and Testing”, Econometrica, vol. 55, no. 2, 251-276.

Ross, S. A. (1976), “The Arbitrage Theory of Capital Asset Pricing”, Journal of Economics Theory, vol. 13, 341-360.

Saad. N. M. (2013). Government Bonds Performance in Malaysia. Journal of Entrepreneurship and Business. vol. 1, no. 1, 52-60.

Safari, M., Ariff, M., Shamsher, M. (2013). Do debt markets price Sukuk and conventional bonds differently? Journal of King Abdulaziz University: Islamic Economies, vol. 26, no. 2, 113-149.

Sariannidis, N 2010, “The Impact of Stock, Energy and Foreign Exchange Markets on the Sugar Market”, International Journal of Business and Economic Sciences Applied Research, vol. 3, no.1, 109-117.

Saima Sarwar, Noor ul Haq, 2017, “Re-assessing Political, Social and Economic Determinants of Economic Growth: An Analysis from Selected Asian Developing Economies”, Journal of Emerging Economies and Islamic Research, vol. 5, no. 1, 82-92.

Shanmugam, M, Will The US Save The World?. (January 2016). Starbizweek. p14.

Sosvilla-Rivero. S., Ramos-Herrera. M. D. C. (2012). The US Dollar-Euro Exchange Rate and Us-Emu Bond Yield Differentials: A Causality Analysis. Cuadernos de economia, vol. 13, 117-128.

Sukor, MEA, Muhammad. R., Gunawa. A. Y. (2008). Malaysian Sukuk: Issues in AccountingStandard. Shariah Journal, vol. 16, no. 2, 63-74.

Williams, J. B. (1938). The Theory of Investment Value, Cambridge, Mass: Harvard University Press.

Downloads

Published

2017-12-31

How to Cite

Arshad, H. ., Muda, R., & Osman, I. (2017). Impact of exchange rate and oil price on the yield of sovereign bond and sukuk: Evidence from Malaysian capital market . Journal of Emerging Economies and Islamic Research, 5(4), 27–41. https://doi.org/10.24191/jeeir.v5i1.6313

Issue

Vol. 5 No. 4 (2017): December 2017 Special Issue

Section

Articles

License

Copyright (c) 2017 Huda Arshad, Ruhaini Muda, Ismah Osman

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.