MONETARY SHOCKS AND MARKET FAITH: A STUDY OF ISLAMIC VS. CONVENTIONAL STOCK RESPONSES

Abstract

This research aims to examine the impact of unforeseen interest rate announcements on conventional and Islamic stocks in Pakistan from 2013 to 2022. An event window of eleven days and an estimating window of fifty days were designated for each occurrence. The projected returns are calculated utilizing the CAPM model for the estimation period (t–50). The calculation of anomalous returns entailed aggregating the values of actual and projected returns. Cumulative abnormal returns (CAR) were later calculated to demonstrate the impact of monetary policy announcements on stock performance. In addition, we employed the Hodrick-Prescott filter to distinguish between expected and unexpected interest rates, examining the impact of interest rate news surprises on the returns of conventional and Islamic stocks. To examine the long-term relationship between interest rate surprises and stock returns, the Engle-Granger co-integration test was employed. The study shown that news shocks significantly impact both conventional and Islamic equities in Pakistan. Moreover, notwithstanding the comparatively limited liquidity and debt reserves of the firms inside Islamic stock indexes, interest rate fluctuations exert a similar or even more pronounced effect on the returns of Islamic equities in comparison to conventional stocks, as indicated by the study.