Predicting the inflation rate in Malaysia using sukuk term structure

The ability to forecast inflation rate accurately is vital since inflation has a big impact on both society and the country in general. One of the methods used to predict inflation rate is by observing the term structure. There have been many studies done on term structure of conventional bonds but...

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Main Authors:	Humaida Banu Samsudin, Nur Atikah Mohamed Rozali, Dini Naziha Mohamad
Format:	Article
Language:	English
Published:	Pusat Pengajian Sains Matematik, Fakulti Sains dan Teknologi, Universiti Kebangsaan Malaysia 2016
Online Access:	http://journalarticle.ukm.my/10201/ http://journalarticle.ukm.my/10201/ http://journalarticle.ukm.my/10201/1/jqma-12-1_2-paper3.pdf

id	ukm-10201
recordtype	eprints
spelling	ukm-102012017-03-15T02:15:56Z http://journalarticle.ukm.my/10201/ Predicting the inflation rate in Malaysia using sukuk term structure Humaida Banu Samsudin, Nur Atikah Mohamed Rozali, Dini Naziha Mohamad, The ability to forecast inflation rate accurately is vital since inflation has a big impact on both society and the country in general. One of the methods used to predict inflation rate is by observing the term structure. There have been many studies done on term structure of conventional bonds but hardly any on sukuk. Therefore, this study aims to test the viability of the term structure of sukuk on predicting the inflation rate in Malaysia, with and without taking into factor term premiums, and compare the predictions with those of the conventional bonds. The results are also compared to a benchmark autoregressive (AR) model of the inflation rate. The monthly interest rate data starting from October 2006 to March 2014 for Malaysian Government Securities (MGS), which is a conventional bond and Government Investment Issues (GII), which is an Islamic bond, were used in this study. Consumer Price Index data from the year 2005 until 2014 were also collected to calculate inflation rates. The one-month interest rate was used to observe the existence of term premium. An autoregressive distributed lag (ARDL) model was chosen to forecast six-month-ahead inflation rates using MGS and GII data with and without accounting for term premiums. The first part of the analysis revealed that term premiums are nonzero and not constant. Furthermore, forecasting results showed that without considering term premiums, neither MGS nor GII term structure was able to accurately predict the six-month-ahead inflation rate. However, incorporating term premiums into the term structure would result in a better forecast of the inflation rate compared to the benchmark AR model. As such, it is hoped that this will spur more interest in the development of sukuk and Islamic economics in terms of research. Pusat Pengajian Sains Matematik, Fakulti Sains dan Teknologi, Universiti Kebangsaan Malaysia 2016-12 Article PeerReviewed application/pdf en http://journalarticle.ukm.my/10201/1/jqma-12-1_2-paper3.pdf Humaida Banu Samsudin, and Nur Atikah Mohamed Rozali, and Dini Naziha Mohamad, (2016) Predicting the inflation rate in Malaysia using sukuk term structure. Journal of Quality Measurement and Analysis, 12 (1-2). pp. 27-36. ISSN 1823-5670 http://www.ukm.my/jqma/jqma12_1_2a.html
repository_type	Digital Repository
institution_category	Local University
institution	Universiti Kebangasaan Malaysia
building	UKM Institutional Repository
collection	Online Access
language	English
description	The ability to forecast inflation rate accurately is vital since inflation has a big impact on both society and the country in general. One of the methods used to predict inflation rate is by observing the term structure. There have been many studies done on term structure of conventional bonds but hardly any on sukuk. Therefore, this study aims to test the viability of the term structure of sukuk on predicting the inflation rate in Malaysia, with and without taking into factor term premiums, and compare the predictions with those of the conventional bonds. The results are also compared to a benchmark autoregressive (AR) model of the inflation rate. The monthly interest rate data starting from October 2006 to March 2014 for Malaysian Government Securities (MGS), which is a conventional bond and Government Investment Issues (GII), which is an Islamic bond, were used in this study. Consumer Price Index data from the year 2005 until 2014 were also collected to calculate inflation rates. The one-month interest rate was used to observe the existence of term premium. An autoregressive distributed lag (ARDL) model was chosen to forecast six-month-ahead inflation rates using MGS and GII data with and without accounting for term premiums. The first part of the analysis revealed that term premiums are nonzero and not constant. Furthermore, forecasting results showed that without considering term premiums, neither MGS nor GII term structure was able to accurately predict the six-month-ahead inflation rate. However, incorporating term premiums into the term structure would result in a better forecast of the inflation rate compared to the benchmark AR model. As such, it is hoped that this will spur more interest in the development of sukuk and Islamic economics in terms of research.
format	Article
author	Humaida Banu Samsudin, Nur Atikah Mohamed Rozali, Dini Naziha Mohamad,
spellingShingle	Humaida Banu Samsudin, Nur Atikah Mohamed Rozali, Dini Naziha Mohamad, Predicting the inflation rate in Malaysia using sukuk term structure
author_facet	Humaida Banu Samsudin, Nur Atikah Mohamed Rozali, Dini Naziha Mohamad,
author_sort	Humaida Banu Samsudin,
title	Predicting the inflation rate in Malaysia using sukuk term structure
title_short	Predicting the inflation rate in Malaysia using sukuk term structure
title_full	Predicting the inflation rate in Malaysia using sukuk term structure
title_fullStr	Predicting the inflation rate in Malaysia using sukuk term structure
title_full_unstemmed	Predicting the inflation rate in Malaysia using sukuk term structure
title_sort	predicting the inflation rate in malaysia using sukuk term structure
publisher	Pusat Pengajian Sains Matematik, Fakulti Sains dan Teknologi, Universiti Kebangsaan Malaysia
publishDate	2016
url	http://journalarticle.ukm.my/10201/ http://journalarticle.ukm.my/10201/ http://journalarticle.ukm.my/10201/1/jqma-12-1_2-paper3.pdf
first_indexed	2023-09-18T19:56:47Z
last_indexed	2023-09-18T19:56:47Z
_version_	1777406582046326784

Predicting the inflation rate in Malaysia using sukuk term structure

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