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Stock market and aggregate consumption asymmetry: evidence from Malaysia

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Author Info

  • Mansor H. Ibrahim
  • Muzafar Shah Habibullah

Abstract

Purpose – The purpose of this paper is to analyze the influences of real share prices on aggregate consumption for Malaysia with the focus on whether there is asymmetry in the long-run relation of the two variables. Design/methodology/approach – The paper specifies aggregate consumption to depend on real income and real share prices. Alternatively, imposing long-run budget constraint, the paper specifies the relation between aggregate consumption and real share prices as ratio to real income. Then, it applies an asymmetric cointegration and error correction modeling. Findings – The cointegration tests indicate the presence of a long-run relation between consumption-income ratio and share price-income ratio. More interestingly, while changes in share prices exert short-run causal influences on Malaysia's private consumption, evidence is found for the adjustments of consumption – income ratio to the long-run equilibrium path only when it is above its long-run value. The paper interprets the finding as suggesting downward revisions in the consumption patterns when there are adverse shocks in share prices and, accordingly, supports the existence of especially negative wealth effect for Malaysia. Research limitations/implications – Owing to data limitations, the paper relies on aggregate consumption and aggregate income data. It acknowledges that the sum of non-durable consumption and flow-of-services from durable purchases and labor income are more appropriate measures of, respectively, consumption and real income. Originality/value – The findings have important implications for understanding consumption behavior in a developing country and can provide insight on the effectiveness of monetary policy.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Studies in Economics and Finance.

Volume (Year): 27 (2010)
Issue (Month): 1 (March)
Pages: 19-29

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Handle: RePEc:eme:sefpps:v:27:y:2010:i:1:p:19-29

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Web page: http://www.emeraldinsight.com

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Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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Related research

Keywords: Consumption; Malaysia; Modelling; Share prices; Stock markets;

References

References listed on IDEAS
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  1. Xiaohui Liu & Chang Shu, 2004. "Consumption and stock markets in Asian economies," International Review of Applied Economics, Taylor and Francis Journals, vol. 18(4), pages 483-496.
  2. Laurence Boone & Claude Giorno & Pete Richardson, 1998. "Stock Market Fluctuations and Consumption Behaviour: Some Recent Evidence," OECD Economics Department Working Papers 208, OECD Publishing.
  3. Mansor H. Ibrahim & Hassanuddeen Aziz, 2003. "Macroeconomic variables and the Malaysian equity market: A view through rolling subsamples," Journal of Economic Studies, Emerald Group Publishing, vol. 30(1), pages 6-27, January.
  4. Enders, Walter & Siklos, Pierre L, 2001. "Cointegration and Threshold Adjustment," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 166-76, April.
  5. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
  6. Rothschild, Michael & Stiglitz, Joseph E., 1971. "Increasing risk II: Its economic consequences," Journal of Economic Theory, Elsevier, vol. 3(1), pages 66-84, March.
  7. Martha Starr-McCluer, 1998. "Stock market wealth and consumer spending," Finance and Economics Discussion Series 1998-20, Board of Governors of the Federal Reserve System (U.S.).
  8. Neftci, Salih N, 1984. "Are Economic Time Series Asymmetric over the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 307-28, April.
  9. Apergis, Nicholas & Miller, Stephen M., 2006. "Consumption asymmetry and the stock market: Empirical evidence," Economics Letters, Elsevier, vol. 93(3), pages 337-342, December.
  10. Joseph P. Byrne & E. Philip Davis, 2003. "Disaggregate Wealth and Aggregate Consumption: an Investigation of Empirical Relationships for the G7," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(2), pages 197-220, 05.
  11. Walter Enders & Selahattin Dibooglu, 2001. "Long-Run Purchasing Power Parity with Asymmetric Adjustment," Southern Economic Journal, Southern Economic Association, vol. 68(2), pages 433-445, October.
  12. Domian, Dale L. & Louton, David A., 1997. "A threshold autoregressive analysis of stock returns and real economic activity," International Review of Economics & Finance, Elsevier, vol. 6(2), pages 167-179.
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