ABSTRACT
The present study empirically investigates, models, and analyzes the long run co-integration relationship of the Dow Jones Islamic market index returns with the Islamic Interbank Benchmark Rate (IIBR) and London Interbank Offered Rate (LIBOR). The study is conducted over the period of November 2011 to April 2016, using a daily frequency. The empirical analysis is conducted by employing the vector autoregressive Johansen-Juliseus (1990) co-integration technique. The estimation results indicate a long relationship of the Dow Jones Islamic market returns with the Islamic Interbank Benchmark Rate (IIBR) and London Interbank Offered Rate (LIBOR). It is very interesting to note that the IIBR, along with the LIBOR, possess a long relationship with Islamic market returns, which is an eye opener for the global financial structure under the dominant interest-based conventional benchmark rate (LIBOR); an Islamic benchmark rate can behave statistically in the similar direction. The prominent finding about the rise of the Islamic finance industry worldwide is that it has the advantage of ribā (interest) free transactions and asset backed financing. This study implicates that the future of the Islamic finance industry tends to be optimistic, especially because of the phasing out of the LIBOR in 2021 and the efforts being made by the global financial industry to bring into existence a rate based on actual transactions rather than subjectivity. This paves ways to success for the Islamic finance industry to prove its strength, with already trillions of dollars of Islamic financial assets worldwide and the increase in the growth rate of these assets (and markets) in the years to come.
