Do Islamic Stocks reinforce Real Economic Activity? Evidence from an Emerging Islamic Capital Market

The principles of the Islamic moral economy encourage actual economic activity and an asset-driven financing model. Accordingly, the study examines the dynamic association between Islamic stocks and actual economic activity in an emerging Islamic capital market. The study employs various robust time series methods to unveil the relationship between Islamic stocks and real economic activity. Moreover, in the presence of other well-known predictors of economic activity like conventional stock index, interest rate, and exchange rate, the study finds a bidirectional causal relationship between the Islamic Shariah-compliant stock index and real economic activity on Pakistan Stock Exchange (PSX). The study's findings reinforce the notion that the development of the Islamic capital market leads to an augmented level of real economic activity.