Stock markets play a vital part towards the economy of a country. The stock market most important role is supporting the growth of the industry and commerce in the country eventually affects the economy of the country to a great extent. That is the reason that a rising stock market is the sign of a developing industrial sector and a growing economy of the country. Thus, the government, industry and even the central banks of the country must keep a close watch on the happenings of the stock market. The stock market is important from both the industry’s point of view as well as the investor’s point of view.
History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood. Rising share prices, for instance, tend to be associated with increased business investment and vice versa. Share prices also affect the wealth of households and their consumption. Therefore, central banks tend to keep an eye on the control and behavior of the stock market and, in general, on the smooth operation of financial system functions. Financial stability is the raison d’??tre of central banks.
History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood.
In the stock market, investor objective is to maximize the portfolio’s expected return and minimize the risk. Return is an amount of revenue an investment generates over a given period of time as percentage of the amount of capital invested.
The stock market plays a play a pivotal role in the growth of the industry and commerce of the country that eventually affects the economy of the country to a great extent. That is reason that the government, industry and even the central banks of the country keep a close watch on the happenings of the stock market. The stock market is important from both the industry’s point of view as well as the investor’s point of view.
In prospects of overall economy, stock market makes it possible for the economy to ensure long-term commitments in real capital. For that reason, level of efficiency measurement of the stock market is very important to the markets players, who ensure long-term real capital in an economy. Since stock market returns are subject to fluctuations, it is essential to determine the forces influencing the stock returns for efficient functioning and development of the stock market and Country. Over the past few decades, numerous studies have been done to find out the relationships between conventional stock returns and macroeconomic variables especially for developed markets. However, regional Islamic stock markets such as Malaysia and Indonesia have not been fully explored because of their small sizes and geographic locations. Therefore, this study attempts to fill this gap by exploring the effect of macroeconomic variables toward the Islamic stock returns in Malaysia and Indonesia. Therefore, the researcher have chosen five macroeconomic variables including gross domestic products, money supply, exchange rate, interest rate and industrial production index to examine the variables with the stock prices. Indeed, there are other variables that affect stock prices but the researcher limit the discussion on these variables because of efficiency in modelling as incorporating many variables result in loss of degree of freedom.