The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1759-0817.htm

Integration of
Integration of Islamic capital Islamic capital
market in ASEAN-5 countries market

Preliminary evidence for broader benefits from

the post-global financial crisis
Ibnu Qizam and Misnen Ardiansyah
Received 4 August 2019
Department of Islamic Economics, Faculty of Islamic Economics and Business, Revised 22 September 2019
State Islamic University Sunan Kalijaga, Yogyakarta, Indonesia, and Accepted 23 October 2019

Abdul Qoyum
Department of Islamic Finance, Faculty of Islamic Economics and Business,
State Islamic University Sunan Kalijaga, Yogyakarta, Indonesia

Abstract
Purpose – The purpose of this study is to investigate the nature and integration of Islamic stock markets
across the Association of Southeast Asian Nations (ASEAN-5) countries for economic community (AEC)
development.
Design/methodology/approach – Using samples of daily closing prices from 2009 to 2014 across
ASEAN-5 countries, co-integration and Granger-causality tests were applied.
Findings – This research finds that Islamic capital markets across ASEAN-5 countries remain highly
integrated despite the global financial crisis of 2008, and it also finds the integration strength between Jakarta
Islamic Index -Indonesia and Bursa Malaysia Emas Sharia-Malaysia Islamic capital markets to be the most
influential across ASEAN-5 countries, while MSCI-Philippine Islamic capital market is the most vulnerable
across ASEAN-5 Islamic capital markets.
Research limitations/implications – The overwhelming benefit of Islamic stock market integration
across ASEAN-5 countries, and, even in a broader context, awaits further inquiry.
Originality/value – Islamic capital markets across ASEAN-5 countries are integrated regardless of the
post-global financial crisis. This contributes to confirming cross-border integration policies, especially for
AEC development.
Keywords Cointegration-Granger causality, Islamic capital market integration,
Global financial crisis
Paper type Research paper

1. Introduction
The discussion on the integration of Islamic capital markets has received substantial
interest both from academicians and practitioners, especially within the context of the
Association of Southeast Asian Nations (ASEAN) economic community (AEC). Many

JEL classification – G10, G11, G14, G15, M40

The administrative and financial support from State Islamic University (UIN) Sunan Kalijaga
Yogyakarta, Yogyakarta, Indonesia, especially from the Research and Community-Engagement
Journal of Islamic Accounting and
Center (LPPM) 2015-2016, is gratefully acknowledged. Many thanks are sincerely due to the editors, Business Research
anonymous reviewers, and also our colleagues at the Faculty of Islamic Economics and Business, © Emerald Publishing Limited
1759-0817
UIN Sunan Kalijaga Yogyakarta, for their reviews and suggestions. DOI 10.1108/JIABR-08-2019-0149
JIABR studies infer that ASEAN capital market integration conveys many benefits. Besides more
opportunities for greater cross-border access, which will be supplied for investors and
issuers, domestic capital markets will also be invigorated to provide more liquidity, scale
and capacity for ASEAN countries as a whole. Then, ASEAN countries will, in turn, exist at
a competitive level against more developed capital markets. Ong (2005) contends that strong
economic linkage and greater capital market efficiency across ASEAN countries will also be
boosted because of economies of scale as well as stability through having manifold players
and enhancing the market’s capacity to be interesting for either global investors or
fundraisers.
In addition, the global allocation of capital and better risk-sharing attributable to lower
volatility may also be enhanced through capital market integration (Kose et al., 2003).
Furthermore, an integrated capital market allows for access to both a larger pond of external
financial sources and investment opportunity set, thereby boosting economic growth rate
(Edison et al., 2002). The risk–return relationship between assets originating from portfolio
selections and asset pricing may also be changed because of capital market integration
(Ragunathan, 1999). Hence, on the one hand, global market integration will make non-global
risk factors diversified, and on the other hand, only global-risk factors are priced for
international assets (Zhang, 2006). For portfolio investors, through market integration,
separate markets will be driven to move and behave together and to have high linkages so
that the advantages of portfolio diversification across countries will increasingly dim
(Click and Plummer, 2005). As a result, the AEC is a vital milestone for ASEAN countries’
economic development. It necessarily means that capital market integration, including the
Islamic capital market, is an inevitable trajectory towards better welfare of countries. This is
a significant development for Islamic finance in ASEAN accordingly.
Thus, many empirical studies have documented the beneficial effects from capital
market integration in the conventional point of view using either inside or outside ASEAN
samples (inter alia, Ratanapakorn and Sharma, 2002; Yang et al., 2003; Narayan et al., 2004;
Floros, 2005; Majid et al., 2007; Ayuso and Blanco, 2001; Morelli, 2010; Lucey and Zhang,
2011; Pyun and An, 2016; Yao et al., 2018; Rangvid et al., 2016; Chevallier et al., 2018; Chana
et al., 2018). In addition, capital market integration also leads to reduced information
asymmetry (Aney et al., 2017) and informational efficiency (Mikołajek-Gocejna, 2014; Hooy
and Lim, 2013; Aawaar et al., 2017; Guan and Wooi, 2017), and vice versa, capital market
integration will be enhanced through lower information asymmetry (Ananchotikul et al.,
2015)[1].
Beyond those above arguments, in addition to stock market integration studies, there are
also a growing number of empirical studies that examine the long-run equilibrium in the
Islamic stock markets and which empirically inquire about its impact on a broader context,
specifically across ASEAN-5 countries. As a result, this study aims at investigating whether
or not the interconnection of Islamic capital market across ASEAN countries does exist; and
if it does, then, to what extent such equilibrium relationship among these markets would last
in the long run. Additionally, this study is conducted to provide a guideline to policymakers
in support of further development of the Islamic capital market to promote ASEAN
economic integration and to alleviate information barriers, which, in turn, result in market
efficiency and growth.
Within the larger body of works in Islamic finance, this study is not only expected to
contribute to provide evidence that Southeast Asia, particularly members of the ASEAN-5
countries, have well-made Islamic capital markets interconnected that exert influence to one
another in the short and long run, but also to show which markets are regionally the most
influential across the ASEAN-5 countries.
 The remainder of this paper is organized as follows. Section 2 reviews the literature on Integration of
capital market integration, with a special focus on Islamic capital markets and developing Islamic capital
countries. Section 3 details the methods used to investigate the extent of Islamic capital
market integration across the ASEAN-5 countries. Section 4 presents, discusses and
market
interprets the results of this study; and Section 5 draws conclusions based on the results in
this paper and offers suggestions for future studies.

2. Literature review
Investors’ loss of confidence in the conventional capital markets attributable to the 1997
Asian financial crisis is a significant turning point for the Islamic capital market industry.
The increased need for open Islamic capital markets is more pronounced after the 2008
financial crisis when the growing demand can be observed both in developed countries,
particularly in Japan, the UK, and the USA, and in developing countries such as Egypt,
Malaysia and Sudan (Kassim, 2010).
An Islamic capital market can be known as a capital market that carries out the
principles of Islamic law in business activities that do not incorporate banned things such as
usury (riba), gambling (maysir), and speculation (gharar). Furthermore, in Islamic capital
markets, all instruments traded must comply with Sharia. In classifying these securities, the
Sharia Advisory Council (SAC) will conduct qualitative and quantitative screening on
individual companies. The council will gather company information from various sources,
for example, firms’ responses to survey forms, firms’ annual financial statements and
inquiries made to the respective firm’s management to determine a firm’s classification as
Sharia-compliant.
Previous studies have been conducted on capital market integration, both specifically
inside and outside ASEAN-5 countries which have been recently popping up. Outside
ASEAN-5 countries, the studies may come from, among others, Ayuso and Blanco (2001),
who investigate whether the degree of financial market integration goes up during the
nineties. Using seven selected stock exchanges, that is, Tokyo, Milan, Frankfurt, Madrid,
Paris, London and New York during the 1990-1994 and the 1995-1999 periods, they find that
stock markets are increasingly more integrated during the nineties. Morelli (2010) examines
the capital market integration across fifteen European countries, all of which belong to the
European Union’s members, and finds that common factors across the European capital
market are priced and documents a degree of capital market integration across the European
capital markets.
By analyzing the co-movement of business cycle between the USA and 57 other
countries during the global financial crisis; Pyun and An (2016) also find that the higher
level of capital market integration between them is, the stronger the co-movement of
business-cycle between the USA and the other counties will be; and otherwise. In this
regard, Yao et al. (2018), even further, investigate the impact of financial-liberalization
policies on the stock market integration in China and the rest of the world for the period
of 2000-2015. Based on the data sets of daily prices from January 3, 2000, to December 31,
2015, for China, the US and the world stock markets, it is found that regardless of
significant fluctuations, the Chinese stock markets show more considerably integration
with the world markets. Specifically, it is found that qualified foreign institutional
investors, qualified domestic institutional investors and Renminbi qualified foreign
institutional investor show consistent and positive impacts on market integration, and
contrarily negative effects when other policy reforms are applied.
Furthermore, the existence of considerable time variations in capital market integration
and consumption risk sharing have been documented by Rangvid et al. (2016) when using
JIABR data from 16 developed countries (USA, U K, France, Canada, Germany, Italy, The
Netherlands, Belgium, Denmark, Switzerland, Spain, Sweden, Norway, Australia, Japan and
South Africa) from 1875 to 2012. Their findings suggest that higher integration of the capital
market leads to more consumption risk sharing in the future. The nature and the extent of
relationships among the African stock markets and their linkages among these markets and
those of regional and global indices are then investigated by Ampomah (2011). Through this
study, despite recent structural adjustments, he contends that segmentation still exists in
the African stock markets from global markets. The volatility of the local index is
immensely characterized as country-specific and could be diminished by cross-diversifying
countries. In conclusion, all the African stock markets, except South Africa, work
independently and are still not aligned with global markets.
The studies addressing this issue inside ASEAN-5 countries can also be noted in the
following findings. This may begin from Roca et al. (1998) who investigate the price linkage
between ASEAN-5 capital markets (Indonesia, Malaysia, Singapore, Thailand and
Philippines), both in the long- and short-term using co-integration approach referring to
Johansen’s models (Johansen, 1988), Granger causality, variance decomposition and impulse
response function from 1988 to 1995. Roca et al. (1998) conclude that ASEAN-5 markets are
closely correlated in the short-term but not in the long-term except for Indonesia. Besides,
the study finds that the Malaysian market commands the greatest influence. The
Singaporean and Thai markets have the greatest number of links with other ASEAN
markets while the Indonesian market does not exhibit any linkage with other markets.
Roca et al. (1998) also argue that there are still diversification opportunities in ASEAN
capital markets, particularly in Indonesia.
Dunis and Shannon (2005) examine the benefit of diversification among emerging
markets for international investors through correlation analysis of Southeast and Central
Asian markets with the U S and UK markets. They find a decrease in correlation between
the USA and Southeast Asian from August 31, 1999, to August 29, 2003, showing that
international diversification would have been beneficial for American investors in this
period. Also, Dunis and Shannon (2005) explain that international portfolio diversification
can contribute to lowering systematic risk from the reduction to un-diversifiable domestic
market exposure. Chevallier et al. (2018) also note that there are continuously more and more
considerable cross-market linkages in the Pacific Basin region. By analyzing
interdependence across the Pacific Basin stock markets, they contend that the US market
shock is more influential than the East-Asian developed markets on the ASEAN markets.
The US and China are the dominant markets that can spread to other markets.
The ASEAN-5 countries’ emerging stock-market integration and their interconnectedness
between the USA and Japanese markets are also examined by Majid et al. (2007). They use a
two-step estimation of co-integration and generalized method of moments through which the
ASEAN-5 capital markets are found to be more integrated among themselves. In addition,
Chana et al. (2018) report that there is market integration in ASEAN. The saving-investment
seems to show a very weak association (suggesting very high capital mobility) in the more
developed ASEAN group of countries, for example, Brunei, Malaysia and Singapore, while
the saving-investment has reflected a very strong association (suggesting very low capital
mobility) in less developed ASEAN group of countries, for example, Cambodia, Laos and
Myanmar.
Market co-integration (long-term equilibrium) between Dow Jones Islamic Market (DJIM)
indices, Kuala Lumpur Shariah Index (KLSI) and Jakarta Islamic Index (JAKISL) is also
documented by Siskawati (2011), that is, unidirectional relationship for DJIM and JAKISL as
well as DJIM and KLSI (global market), and bidirectional relationship for JAKISL and KLSI
(regional Islamic market), implying that the DJIM takes an effect on both JAKISL and KLSI. Integration of
This is contrary to Hussin et al. (2013), who do not find long-run equilibrium between the Islamic capital
Indonesian and Malaysian Islamic equity markets using the vector autoregression (VAR)
method.
market
However, using monthly data during the period of January 2007 to May 2012, Hussin
et al. (2013) found that no long-term or equilibrium relationship exists between The
Financial Times Stock Exchange (FTSE), Bursa Malaysia Emas Sharia (FBMES), JAKISL
and DJIM indices. Given these results, it is inferred that in addition to no-integration
between the Malaysian, Indonesian and international Islamic stock markets, diversification
opportunities are more welcome for investors of Malaysia’s market where, using Granger
causality, the returns of JAKISL and DJIM are affected by the FBMES in the short-term[2].
Kassim (2010) specifically observes that Islamic capital markets cannot tests away from
the global financial crisis. This study documents that stronger integration among Islamic
capital markets has occurred during the period of crisis compared to non-crisis periods.
Kabir et al. (2013) then address the issue of Islamic equity markets integration, enquiring not
only how capital markets move to be more integrated, but also detailing them into the
temporary and permanent components of these markets. Using five Dow Jones Islamic
equity indices, that is from the Asia Pacific, Eurozone, Kuwait, the UK and the USA; this
study notes that a co-integrating relationship exists among the selected Islamic markets in
which the Eurozone Islamic equity market shows a leading impact while the UK market
lags. This study also concludes that financial crises have an impact on investment in Islamic
equity markets.
In addition, capital market integration may also result in reduced information
asymmetry (Hayek, 1945; Aney et al., 2017) and will, in turn, jack up informational efficiency
(see, inter alia, Rosser, 2003; Mikołajek-Gocejna, 2014; Hooy and Lim, 2013; and Guan and
Wooi, 2017; Aawaar et al., 2017). Using cross-listed firms on the BSE as the sample, they find
that at the firm-level, market integration has a positive impact on reduced information
asymmetry and has driven enhanced access to capital.
Referring back to the definition of information asymmetry as previously stated, in the
early-nineteenth century, by Marshall and also Hayek (1945), Mikołajek-Gocejna (2014)
holds the view that information asymmetry is a matter of an information imbalance
available to the market participants, resulting in imperfect (incomplete) information. This,
then, manifests some implications, specifically in the context of various disproportionality
between the work committed by employees and their wages (Mikołajek-Gocejna, 2014).
Rosser (2003), furthermore, holds that incomplete information leads to market inefficiency.
These findings are confirmed by Hooy and Lim (2013). Using 49 national stock markets as their
sample, they prove that there is a positive correlation between market integration and the
degree of informational efficiency (Aawaar et al., 2017). The same assertion is also followed by
Hooy and Lim (2013) and Guan and Wooi (2017) and Ananchotikul et al. (2015). The inverse
relation, however, is also found in Ananchotikul et al. (2015), who propose that to be able to
spur capital market integration, information barriers should be attenuated, that is, through
lower information asymmetry.

3. Data and methods

3.1 Integration test
This study captured data from the Islamic capital markets of the ASEAN-5 countries, that
is, Indonesia, Malaysia, Philippines, Singapore and Thailand. A total of 2,031 observations
of the log of each index’s daily closing prices were observed from April 14, 2009, to
November 14, 2014, retrieved from the Bloomberg database. First, we analyze the
JIABR integration of Islamic capital markets by applying a simple test of correlation to gauge
the strength and direction of the linkage among the stock indices. Thus, an examination of
the relationship only measured by the extent of linear correlation between two variables
demonstrated tiny views on the dynamic associations and causality among stock markets.
As a result, the examination of stock market integration is continued by applying the
following three tests.
3.1.1 Augmented Dickey–Fuller test Before analyzing the co-integration test, an
investigation was directed to check the univariate properties of the data series, that is,
whether the data series belongs to non-stationary or reflects a unit root:

X
k
DYt ¼ a þ b Yt1 þ g DYt1 þ m t (1)
i¼1

where DYt is y series in the form of the first difference; a and m t refers to a constant term
and the residual term respectively while k is the values of yt in the lagged form to allow for
serial correlation in the residuals. In the examination of augmented Dickey–Fuller (ADF),
the null hypothesis demonstrates that b = 0, If the absolute value of the counted t-statistics
for b outpaces the absolute critical value, then we must reject the null hypothesis that the
log level of series belongs to non-stationary. If it is less than the critical value, we conclude
that the log level of y belongs to non-stationary. In this same way, we repeat the regression
to apply for the logarithmic first-difference values of the series.
3.1.2 Johansen–Juselius co-integration test These tests in this study were run by
following Johansen and Juselius’s (1990) procedures. Starting from an approach to determine
a vector of n potentially endogenous variables Zt, we assume that Zt is an unrestricted VAR
system to be relaxed up to k-lags:

Zt ¼ A1 Zt1 þ . . . þ Ak Ztk þ 1Dt þ m þ « t (2)

where A1 originates from an n  n matrix of coefficients, m refers to a constant term, Dt

indicates seasonal dummy variable orthogonal to constant term m while « t comes from an
independent and identically distributed Gaussian process.
When both sides of equation (2) are subtracted with Zt-1, equation (2) could be
transformed into a vector error-correction model (VECM). VECM depicts information as to
short- and long-term adjustments for changes in Zt:

DZt ¼ C1 DZt1 þ . . . þ Ck1 DZtk þ PDZtk þ 1Dt þ m þ « t (3)

3.1.3 Engle–Granger co-integration test. In testing relationships or integration in financial

markets, the most often used method is the co-integration test. Granger (1981, 1986) initially
introduced the method of co-integration, and subsequently, Engle and Granger (1987)
developed this model further. This second method has combined the existence of non-
stationary, long-term relationships and short-term dynamics in the modeling process.
The primary purpose of the co-integration analysis is to identify whether there is a
common stochastic trend in the price data, and then by reference to this common trend, a
dynamic analysis of the correlation in the stock indices is carried out. Engle and Granger
(1987) introduced the two-stage estimation method. First, we assess the long-term
equilibrium relationship, and, then, secondly, estimate the dynamic-error-correction
relationship applying lagged residuals. This approach is used to examine the existence of
co-integration among the stock indices. According to Holden and Thompson (1992), this Integration of
two-stage method has an advantage, that is, the two-stage estimation is so separate that the Islamic capital
dynamic model’s changes do not require re-estimation of the static model previously run in
the first stage. Hence, this model provides modeling procedures to be followed more easily.
market
The definition of causality test applies when the values of the variable X in the past can
better estimate the variable Y, suggesting that X causes Y (Granger et al., 1986). This
expression can be depicted as in the following formula:

X
n X
N
Xt ¼ a 0 a þ ai Xt1 þ bi Ytj þ m x;t (4)
i¼1 j¼1

X
n X
N
Yt ¼ b0 a þ ai Xti þ bi Ytj þ m y;t (5)
i¼1 j¼1

4. Results and discussions

4.1 Descriptive statistics
Since the end of the 2008 financial crisis, there has been a steady improvement in the
performance of ASEAN-5 Islamic capital markets. Figure 1 shows the substantial decline
suffered by Islamic capital markets between 2011 and 2012 because of the financial meltdown
and the subsequent climb up until November 2014. The positive movement of these five
Islamic indices is in line with the post-crisis recovery periods. The graph in Figure 1 also
demonstrates similar movement patterns between these ASEAN-5 Islamic indices.
Table I provides the statistical summary of the 2,031 returns of ASEAN-5 countries.
MSCI (Morgan Stanley Capital International)-Philippines has been the most active and
profitable market in comparison, with the average daily returns of 0.000703. This is followed
by JII (Jakarta Islamic Index)-Indonesia at 0.0005539, FTSE-Thailand Islamic Index at
around 0.000516 and the Malaysian Islamic index at 0.000332. DJIM-Singapore
underperforms in comparison to other ASEAN-5 markets. However, in comparison to other
market indices, MSCI Philippines (as demonstrated by its standard deviation) has the
highest volatility at 0.014266 that commensurate with its returns. The smallest risk is

Figure 1.
Movements of the
indices in the
observed period
JIABR experienced by Malaysia Islamic Index with a standard deviation of 0.004861. The negative
value of skewness of all Islamic indices except for the Malaysia Islamic index indicates that
the distributions of the series are skewed to the left. The Jarque–Bera values of the indices
suggest that the indices are not normally distributed. The normality assumption,
fortunately, can be ignored for a large number of observations.
Correlation is an essential measure of the strength of the association between the Islamic
capital markets across ASEAN-5 countries. Table II shows that the relationship between the
Malaysia Islamic Index and JII-Indonesia is found to be the highest with a coefficient of
0.52932, followed by Malaysia Islamic Index and DJIM-Singapore at 0.510669. JII-Indonesia
also indicates a significant correlation movement with the Singapore Islamic Index and
Thailand Islamic Index.
Additionally, Table II also indicates that the Philippine Islamic Index has the lowest
correlation with all other ASEAN Islamic indices. In contrast, the Singapore Islamic Index
has the highest correlation with other ASEAN-5 Islamic capital markets. This simple
correlation shows that the Philippine Islamic capital market moves differently with other
ASEAN-5 Islamic capital markets and that an investor can benefit from diversifying into the
Philippine market.

4.2 Augmented Dickey–Fuller (ADF) test

Table III summarizes the ADF test results. Upon first-differencing all the data from the
ASEAN-5 Islamic capital markets, these results of this test have shown that we must reject
the null hypothesis at the 1 per cent level, indicating that all the series are stationary when
integrated of order 1, namely, I (1).
Previous tests have affirmed that the data stationarity occurs in the same order;
therefore, it is possible to proceed with further co-integration investigations.

Details of desc. statistics Indonesia Malaysia Philippines Singapore Thailand

Mean 0.000539 0.000338 0.000703 0.000262 0.000516

Median 0.000000 0.000000 0.000000 0.000000 0.000000
Max. 0.091503 0.036627 0.094864 0.046126 0.064742
Min. 0.094310 0.028202 0.078224 0.053533 0.058409
Std. Dev. 0.011942 0.004861 0.014266 0.008691 0.010725
Skew. 0.113546 0.149598 0.337659 0.142985 0.052420
Kurt. 10.11734 9.434127 9.521253 6.403625 7.964503
Jarque–Bera 4291.172 3510.880 3637.419 987.2729 2086.622
Table I. Prob. 0.000000 0.000000 0.000000 0.000000 0.000000
Descriptive statistics Sum 1.094156 0.686475 1.426800 0.531749 1.047343
for Islamic capital Sum Sq. Dev. 0.289518 0.047962 0.413148 0.153338 0.233487
market indices Obs 2,031 2,031 2,031 2,031 2,031

Table II.
Coefficient Variables Indonesia Malaysia Philipines Singapore
correlations of Malaysia 0.529320 1.000000
Islamic stock indices Philippines 0.288303 0.348009 1.000000
and variables across Singapore 0.491465 0.510669 0.265586 1.000000
ASEAN-5 countries Thailand 0.465733 0.439478 0.208391 0.425765
This study will use Johansen’s multivariate co-integration and will examine Integration of
whether the ASEAN-5 Islamic capital markets have a long-run relationship or Islamic capital
equilibrium.
market
4.3 Johansen’s co-integration test
Trace and Max Eigenvalue tests are highlighted in Table IV. The results shown here are
evident that co-integration exists across ASEAN-5 Islamic capital markets. Hence, we reject
the null hypothesis of no co-integration (r = 0) at 5 per cent because the trace statistics (l =
321.8784) is greater than 5 per cent critical value (l = 3.84).
Besides, Max-Eigen statistics exceeds the critical value at 5 per cent. Therefore,
we conclude that a long-run or equilibrium relationship does exist between JII-
Indonesia, FBMES-Malaysia, MSCI-Philippines, DJIM-Singapore and FTSE-
Thailand Islamic indices. Given the results, we also find that all Islamic capital
markets in ASEAN countries are integrated in the long-run. This will create less
opportunity for the investor to diversify their portfolio across ASEAN-5 Islamic
capital markets.
Given these results, this study demonstrates that there is a unique co-integrating
vector governing the long-run association among variables. In other words, we would
contend that all Islamic capital markets across ASEAN-5 countries, after the 2008
global financial crisis, are co-integrated, relying on the results of the Johansen–
Juselius tests. These variables are linked together in the long-term, and their
deviations from the long-term equilibrium path will be corrected. Hence, all these
facts provide strong evidence that ASEAN-5 Islamic capital markets are integrated
(Table V).

The unit root test Variable Coef. Std. Error t-stat. Prob.

ADF test Indonesia 0.996153 0.002541 44.86040 0.0000

Malaysia 0.914634 0.022064 41.45308 0.0000
Philippines 0.999673 0.022126 45.18011 0.0000 Table III.
Singapore 1.027715 0.022195 46.30442 0.0000 Augmented Dickey–
Thailand 1.056020 0.022165 47.64455 0.0000 Fuller (ADF) test

Hypothesized Trace 0.05

No. of CE(s) Eigen-value Statistic Critical value

None* 0.229487 2138.814 69.81889

At most 1* 0.211737 1610.638 47.85613
At most 2* 0.190799 1128.606 29.79707
At most 3* 0.170125 699.6870 15.49471
At most 4* 0.146896 321.8784 3.841466
Table IV.
Notes: Trace test shows five co-integrating equations at the 0.05 level; *refers to the rejection of the Johansen co-
hypothesis at the 0.05 level integration test
JIABR 4.4 Engle–Granger test
We, then, apply the Granger causality test to examine the causality direction between JII-
Indonesia, FBMES-Malaysia, MSCI-Philippines, DJIM-Singapore and FTSE-Thailand.
Figure 2 reveals the Granger-causality-test results for all variables in this study. Each
Islamic capital market shows a different causal relationship concerning other markets and
the degree of changes in Islamic equity prices. Based on the results’ p-value or critical value,
we can justify the occurrence of short-run causality.
At a 5 per cent significance level, the F-statistics show that there is bidirectional causality
between JII-Indonesia and FBMES-Malaysia. In other words, the shocks in JII-Indonesia in
the short-run will cause the short-run disequilibrium for FBMES-Malaysia, and vice versa.
Besides, the results in Figure 2 demonstrate that there are unidirectional causalities between

Hypothesized 0.05
No. of CE(s) Eigen-value Max-Eigen statistic Critical value

None* 0.229487 528.1759 33.87687

At most 1* 0.211737 482.0321 27.58434
At most 2* 0.190799 428.9194 21.13162
At most 3* 0.170125 377.8085 14.26460
At most 4* 0.146896 321.8784 3.841466
Table V. Notes: Trace test shows five co-integrating equation at the 0.05 level; *refers to the rejection of the
Eigenvalue table hypothesis at the 0.05 level

Granger Causality Test Result

Granger causality directions of relationship F-Statistic Prob.
MALAYSIA INDONESIA 3.04211; 11.3766 0.0480**; 1.E-05***
PHILIPPINES INDONESIA 1.64778 0.1927
INDONESIA PHILIPPINES 8.20085 0.0003***
SINGAPORE INDONESIA 1.62659 0.1969
INDONESIA SINGAPORE 7.06345 0.0009***
THAILAND INDONESIA 0.17223 0.8418
INDONESIA THAILAND 2.28985 0.1015
PHILIPPINES MALAYSIA 0.67634 0.5086
MALAYSIA PHILIPPINES 6.82489 0.0011***
SINGAPORE MALAYSIA 0.16180 0.8506
MALAYSIA SINGAPORE 3.74054 0.0239**
THAILAND MALAYSIA 5.26616 0.0052***
MALAYSIA THAILAND 1.14642 0.3180
SINGAPORE PHILIPPINES 4.71046 0.0091***
PHILIPPINES SINGAPORE 0.59282 0.5529
THAILAND PHILIPPINES 9.33239 9.E-05***
PHILIPPINES THAILAND 0.86506 0.4212
THAILAND SINGAPORE 10.8476 2.E-05***
SINGAPORE THAILAND 0.41048 0.6634

Notes: refers to no-causality relationship; refers to bi-directional

Figure 2. causality relationship; refers to uni-directional causality-relationship.
Granger causality The asterisks of *, **, and *** refer to significant levels at 10%, 5%, and 1%
test result
respectively
some Islamic capital markets, that is, from JII-Indonesia to MSCI-Philippines, JII-Indonesia Integration of
to DJIM-Singapore, FBMES-Malaysia to MSCI-Philippines, FBMES-Malaysia to DJIM- Islamic capital
Singapore, FTSE-Thailand to FBMES-Malaysia, FTSE-Thailand to MSCI-Philippines and
FTSE-Thailand to DJIM-Singapore. This test shows that the Islamic capital markets in
market
Indonesia, Thailand and Malaysia are the most influential in ASEAN. In contrast, the
Philippine Islamic capital market is the most vulnerable in the region.

4.5 Variance decomposition

Variance decomposition (VDC) is run in this research to determine the forecast-error
percentage of variation for which the other variables account in the short-term dynamics
and interactions. However, it does not provide information on the variability of Islamic
capital market changes in response to shocks or innovations in other markets. We explore
VDC based on VAR specification to detect the percentage error. In line with the Johansen
test, the VAR lag-length is set to 2, which is adequate to make the error-terms serially
uncorrelated. Table VI below shows the VDC results.
Table VI shows the VDC results of ASEAN-5 Islamic capital markets. VDC is divided
every six months; hence this study uses VDC for 6-month (1), 30-month (5), 54-month (9) and
60-month (12) periods. Given these results, there is evidence of interaction across ASEAN-5
Islamic capital markets. Over a 60-month period, the variation in JII-Indonesia is mostly
attributed to itself (81.41 per cent) and FBMES-Malaysia (22.26 per cent). Other ASEAN-5
Islamic stock indices explain only a small proportion of this variation.
For FBMES-Malaysia, the variation in this index is predominantly because of
changes in the Indonesian market, explaining 30.229 per cent of the variation after a 60-
month period. The MSCI-Philippines, DJIM-Singapore and FTSE-Thailand indices only
explain an average of 0.12 per cent of the variation in the Malaysian index. This
indicates that the JII-Indonesia and FBMES-Malaysia indices are interdependent. Over

Innovation in (%)
Variables Period Indonesia Malaysia Philippines Singapore Thailand

Indonesia 1 100.0000 0.000000 0.000000 0.000000 0.000000

5 79.41106 20.269478 0.215703 0.057084 0.046679
9 80.41103 21.269480 0.215713 0.057092 0.046681
12 81.41103 22.269480 0.215713 0.057092 0.046681
Malaysia 1 29.04018 70.95982 0.000000 0.000000 0.000000
5 30.22987 69.33338 0.125627 0.070815 0.240302
9 30.22987 69.33337 0.125647 0.070817 0.240304
12 30.22987 69.33337 0.125647 0.070817 0.240304
Philippines 1 8.758910 4.431031 86.81006 0.000000 0.000000
5 9.426414 4.518232 85.67815 0.078346 0.298858
9 9.426420 4.518234 85.67810 0.078380 0.298867
12 9.426420 4.518234 85.67810 0.078380 0.298867
Singapore 1 24.50929 8.284576 0.390368 66.81577 0.000000
5 24.44299 8.166879 0.434625 66.36702 0.588490
9 24.44298 8.166877 0.434635 66.36700 0.588500
12 24.44298 8.166877 0.434635 66.36700 0.588500
Thailand 1 21.71735 5.380274 0.083979 2.728143 70.09026 Table VI.
5 21.59304 5.636424 0.112234 2.734219 69.92408 Variance
9 21.59304 5.636424 0.112235 2.734219 69.92408 decomposition
12 21.59304 5.636424 0.112235 2.734219 69.92408 function
JIABR the same period, the JII-Indonesia and FBMES-Malaysia respectively explain 9.42 per
cent and 4.518 per cent of the variation in the MSCI-Philippine index, and the rest is
attributable to the index itself.
This study also notes the importance of the explanatory power of the JII-Indonesia and
FBMES-Malaysia indices in estimating the variability of the DJIM-Singapore index. This is
also true for the Thai Islamic capital market, where the Malaysian and Indonesian indices
have a strong impact on the variability of the FTSE-Thailand index. Given these results, it
can be inferred that the Malaysian and Indonesian Islamic capital markets play an essential
role in influencing other markets across ASEAN-5 countries.

5. Conclusion
This paper analyzes the short- and long-run relationships between JII-Indonesia, FBMES-
Malaysia, MSCI-Philippines, DJIM-Singapore and FTSE-Thailand from 2009 to 2014. We
have found that the Islamic capital markets are integrated across ASEAN-5 countries
regardless of the post-global financial crisis (Kassim, 2010), as shown by the co-integration
test. This means that any short-run deviation in the Islamic capital markets will be adjusted
in the long run. In the short run, the variance across ASEAN-5 Islamic capital markets will
be impacted by shocks of other ASEAN markets, but these markets will attain equilibrium
in the long run, suggesting that no beneficial effect of diversification is found across
ASEAN-5 Islamic capital markets in the long-term.
Henceforth, this research also finds that the Indonesian and Malaysian Islamic capital
markets have the most substantial influence across ASEAN-5 Islamic capital markets, as
shown by the VDC test. This test also indicates that the MSCI-Philippine Islamic market is the
most vulnerable across ASEAN-5 Islamic capital markets. This does make sense to happen
because the variance of the Philippine market is more attributable to the other ASEAN-4
Islamic capital markets, but it does not exert any influence on other regional markets.
These results also suggest that the ideas to implement and develop the ASEAN AEC can
be endorsed through regional cross-border policies to come to the close integration across
ASEAN Islamic capital markets.
To improve generalizability, future studies should include all ASEAN countries. In
addition, future research had better be led to investigate more deeply what impact Islamic
capital market integration could bring empirically, for example, inter alia, expanding
previous studies on how capital market integration has an impact on information
asymmetry and informational efficiency (Mikołajek-Gocejna, 2014; Hooy and Lim, 2013;
Guan and Wooi, 2017; Ananchotikul et al., 2015), and, most likely, on other more mutual-
benefits of trading and corporate governance, especially across ASEAN-5 countries, and
more broadly across all ASEAN countries.

Notes
1. Despite many benefits that may be earned from capital market integration, some researchers
contend that promoting market integration or lowering market segmentation demotes the ability
of governments to make independent economic policies (Swanson, 1987); moreover, the welfare of
domestic investors may vanish because of inefficient portfolio from market integration
(Kim et al., 2014).
2. In opposite to the extant literature describing the benefits of market integration, Kim et al. (2014)
analytically show that the welfare of domestic investors will diminish together with inefficient
portfolios from market integration; and the welfare enhancement of all domestic investors will
happen when efficient portfolio holdings exist before market integration.
References Integration of
Aawaar, G.M., Tewari, D.D. and Liu, Z. (2017), “Market integration and informational efficiency of Islamic capital
Africa’s stock markets”, Frontiers in Finance and Economics, Vol. 14 No. 2, pp. 50-84, available
at: https://ssrn.com/abstract=3094562
market
Ampomah, S.A. (2011), “Stock market integration in Africa”, Managerial Finance, Vol. 37 No. 3,
pp. 242-256, available at: https://doi.org/10.1108/03074351111113306
Ananchotikul, N., Piao, S. and Zoli, E. (2015), “Drivers of financial integration – implications for
Asia”, IMF working paper, available at: www.imf.org/external/pubs/ft/wp/2015/wp15160.
pdf
Aney, M. Banerji, S. and Lampousis, A. (2017), “Financial market integration and firms’ access to
Capital: evidence from the national stock exchange in India (a final report to IGC) (no. I-35121-
INC-3)”, International Growth Center (IGC), available at: www.theigc.org/wp-content/uploads/
2017/04/Anney-et-al-2017-final-report-pt-2.pdf
Ayuso, J. and Blanco, R. (2001), “Has financial market integration increased during the nineties?”,
Journal of International Financial Markets, Institutions and Money, Vol. 11 Nos 3/4, pp. 265-287,
available at: https://doi.org/10.1016/S1042-4431(01)00036-1
Chana, K.S., Dang, V.Q.T. and Lai, J.T. (2018), “Capital market integration in ASEAN: a non-stationary
panel data analysis”, The North American Journal of Economics and Finance, Vol. 46, 14 May,
available at: https://doi.org/10.1016/j.najef.2018.04.010
Chevallier, J., Nguyen, D.K., Siverskog, J. and Uddin, G.S. (2018), “Market integration and financial
linkages among stock markets in pacific basin countries”, Journal of Empirical Finance, Vol. 46,
pp. 77-92, available at: https://doi.org/10.1016/j.jempfin.2017.12.006
Click, R.W. and Plummer, M.G. (2005), “Stock market integration in ASEAN after the Asian financial
crisis”, Journal of Asian Economics, Vol. 16 No. 1, pp. 5-28, available at: https://doi.org/10.1016/j.
asieco.2004.11.018
Dunis, C.L. and Shannon, G. (2005), “Emerging markets of South-East and Central Asia: do they still
offer a diversification benefit?”, Journal of Asset Management, Vol. 6 No. 3, pp. 168-190, available
at: https://link.springer.com/article/10.1057/palgrave.jam.2240174
Edison, H.J., Levine, R., Ricci, L. and Sløk, T. (2002), “International financial integration and economic
growth”, Journal of International Money and Finance, Vol. 21 No. 6, pp. 749-776, available at:
https://doi.org/10.1016/S0261-5606(02)00021-9
Engle, R.F. and Granger, C.W.J. (1987), “Co-integration, error correction: representation, estimation and
testing”, Econometrica, Vol. 55 No. 2, pp. 251-276; available at: https://doi.org/10.2307/1913236
Floros, C. (2005), “Price linkages between the US, Japan and UK stock markets”, Financial Markets and
Portfolio Management, Vol. 19 No. 2, pp. 169-178, available at: https://link.springer.com/article/
10.1007/s11408-005-3384-2
Granger, C.W.J. (1981), “Some properties of time series data and their use in econometric model
specification”, Journal of Econometrics, Vol. 16 No. 1, pp. 121-130, available at: https://doi.org/
10.1016/0304-4076(81)90079-8
Granger, C.W.J. (1986), “Developments in the study of cointegrated economic variables”, Oxford
Bulletin of Economics and Statistics, Vol. 48 No. 3, pp. 213-228; available at: https://doi.org/
10.1111/j.1468-0084.1986.mp48003002.x
Granger, C.W.J. Robins, R.P. and Engle, R.F. (1986), “Wholesale and retail prices: bivariate time-series
modeling with forecastable error variances”, in Model reliability, pp. 1-17, available at: www.
econbiz.de/Record/wholesale-and-retail-prices-bivariate-time-series-modeling-with-forecastable-
error-variances-granger/10001274970
Guan, T.K. and Wooi, H.C. (2017), “Does market integration promote to firm information efficiency?
Empirical evidence for Malaysia listed firms”, Jurnal Ekonomi Malaysia, Vol. 51 No. 2, pp. 23-32,
available at: http://dx.doi.org/10.17576/JEM-2017-5001-3
JIABR Hayek, F.A. (1945), “The use of knowledge in society”, The American Economic Review, Vol. 35 No. 4,
pp. 519-530, available at: http://links.jstor.org/sici?sici=0002-8282%28194509%2935%3A4%
3C519%3ATUOKIS%3E2.0.CO%3B2-1
Holden, K. and Thompson, J. (1992), “Co-integration: an introductory survey”, British Review of Economic
Issues, Vol. 14 No. 33, pp. 1-55, available at: www.wbaonline.co.uk/abstract.asp?id=14382
Hooy, C.W. and Lim, K.P. (2013), “Is market integration associated with informational efficiency of
stock markets?”, Journal of Policy Modeling, Vol. 35 No. 1, pp. 29-44, available at: https://doi.org/
10.1016/j.jpolmod.2012.09.002
Hussin, M.Y.M., Yusof, Y.A., Muhammad, F., Razak, Z.A., Hashim, E. and Marwan, N.F. (2013), “The
integration of Islamic stock markets: does a problem for investors?”, Labuan E-Journal of
Muamalat and Society, Vol. 7, pp. 17-27, available at: wwwkal.ums.edu.my/LJMS/index.php/
2007-7?download=44:the-integration-of-islamic-stock-markets-does-a-problem-for-investors
Johansen, S. (1988), “Statistical analysis of cointegration vectors”, Journal of Economic Dynamics
and Control, Vol. 12 Nos 2/3, pp. 231-254, available at: https://doi.org/10.1016/0165-1889(88)
90041-3
Johansen, S. and Juselius, K. (1990), “Maximum likelihood estimation and inference on
cointegration-with applications to the demand for money”, Oxford Bulletin of Economics and
Statistics, Vol. 52 No. 2, pp. 169-210, available at: https://doi.org/10.1111/j.1468-0084.1990.
mp52002003.x
Kabir, S.H., Dewandaru, G. and Masih, M. (2013), “Are Islamic stock markets integrated globally?
Evidence from time-series techniques”, Australian Journal of Basic and Applied Sciences, Vol. 7
No. 7, pp. 702-720, available at: http://ajbasweb.com/old/ajbas/2013/may/702-720.pdf
Kassim, S.H. (2010), “Global financial crisis of Islamic stock markets in developed and developing
countries [visiting research fellow (VRF series, no. 451)]”, Institute of developing Economies,
Japan External Trade Organization, available at: www.ide.go.jp/library/English/Publish/
Download/Vrf/pdf/461.pdf
Kim, I.J., Kim, S.J. and Yoon, S.J. (2014), “Capital market integration: Domestic investors’ view”,
International Review of Economics and Finance, Vol. 33, pp. 238-256, doi: 10.1016/j.
iref.2014.05.007.
Kose, M.A., Prasad, E.S. and Terrones, M.E. (2003), “Financial integration and macroeconomic
volatility”, Working Paper, IMF, available at: www.imf.org/external/pubs/ft/wp/2003/wp0350.
pdf
Lucey, B.M. and Zhang, Q.Y. (2011), “Financial integration and emerging markets capital structure”,
Journal of Banking and Finance, Vol. 35 No. 5, pp. 1228-1238, available at: https://doi.org/
10.1016/j.jbankfin.2010.10.017
Majid, M.S.A., Yusof, R.M. and Razal, A.N. (2007), “Dynamics financial linkage among selected OIC
countries”, Journal of Economic Cooperation, Vol. 28 No. 2, pp. 25-56, available at: www.sesric.
org/files/article/199.pdf
Mikołajek-Gocejna, M. (2014), “Information asymmetry and the problem of informational efficiency on
capital markets”, Investor Expectations in Value Based Management, pp. 147-175, available at:
https://doi.org/10.1007/978-3-319-06847-3_6
Morelli, D. (2010), “European Capital market integration: an empirical study based on a European asset
pricing model”, Journal of International Financial Markets, Institutions and Money, Vol. 20 No. 4,
pp. 363-375, available at: https://doi.org/10.1016/j.intfin.2010.03.007
Narayan, P., Smyth, R. and Nandha, M. (2004), “Interdependence and dynamic linkages between the
emerging stock markets of South Asia”, Accounting and Finance, Vol. 44 No. 3, pp. 419-439,
available at: https://doi.org/10.1111/j.1467-629x.2004.00113.x
Ong, C.T. (2005), “Towards an integrated ASEAN capital market”, at Bank Negara conference,
expanding ASEAN-EU economic links: the role of the Euro. Kuala Lumpur.
Pyun, J.H. and An, J. (2016), “Capital and credit market integration and real economic contagion during Integration of
the global financial crisis”, Journal of International Money and Finance, Vol. 67, pp. 172-193, doi:
10.1016/j.jimonfin.2016.04.004. Islamic capital
Ragunathan, V. (1999), “Financial deregulation and integration: an Australian perspective”, Journal of market
Economics and Business, Vol. 51 No. 6, pp. 505-514, available at: https://doi.org/10.1016/S0148-
6195(99)00018-1
Rangvid, J.J., Santa-Clara, P. and Schmeling, M. (2016), “Capital market integration and consumption
risk sharing over the long run”, Journal of International Economics, Vol. 103, pp. 27-43, available
at: https://doi.org/10.1016/j.jinteco.2016.08.00
Ratanapakorn, O. and Sharma, S.C. (2002), “Interrelationships among regional stock indices”, Review of
Financial Economics, Vol. 11 No. 2, pp. 91-108, available at: https://doi.org/10.1016/S1059-0560
(02)00103-X
Roca, E.D., Selvanathan, E.A. and Shepherd, W.F. (1998), “Are the ASEAN equity markets
interdependent”, ASEAN Economic Bulletin, Vol. 15 No. 2, pp. 109-120, available at: www.jstor.
org/stable/25773519
Rosser, J.B. Jr. (2003), “A Nobel Prize for asymmetric information: the economic contributions of George
Akerlof, Michael Spence and Joseph Stiglitz”, Review of Political Economy, Vol. 15 No. 1, pp. 3-21,
available at: https://doi.org/10.1080/09538250308445
Siskawati, E. (2011), “Islamic capital market interconnection: evidence from Jakarta Islamic index to the
regional Islamic market and global Islamic market”, Jurnal Akuntansi and Manajemen, Vol. 6
No. 2, pp. 153-156.
Swanson, P.E. (1987), “Capital market integration over the past decade: the case of the US dollar”,
Journal of International Money and Finance, Vol. 6 No. 2, pp. 215-225, available at: https://doi.
org/10.1016/0261-5606(87)90035-0
Yang, J., Kolari, J.W. and Min, I. (2003), “Stock market integration and financial crises: the case of Asia”,
Applied Financial Economics, Vol. 13 No. 7, pp. 477-486, available at: https://doi.org/10.1080/
09603100210161965
Yao, S., He, H., Chen, S. and Ou, J. (2018), “Financial liberalization and cross-border market integration:
evidence from China’s stock market”, International Review of Economics and Finance, available
at: https://doi.org/10.1016/j.iref.2018.03.023
Zhang, X. (2006), “Specification tests of international asset pricing models”, Journal of International
Money and Finance, Vol. 25 No. 2, pp. 275-307, available at: https://doi.org/10.1016/j.
jimonfin.2005.11.003

Corresponding author
Ibnu Qizam can be contacted at: qzami68@gmail.com

For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
Or contact us for further details: permissions@emeraldinsight.com