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Macroeconomic Variables, Exchange Rate And Stock Price: A Malaysian Perspective

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  • Mansor H. Ibrahim and Wan Sulaiman Wan Yusoff

    (International Islamic University Malaysia)

Abstract

The paper analyzes dynamic interactions among three macroeconomic variables (real output, price level, and money supply), exchange rate, and equity prices for the Malaysian case using time series techniques of cointegration and vector autoregression. In the analysis, we rely on variance decompositions and impulse-response functions to gauge the strength of the interactions among the variables. The Malaysian stock prices seem to be driven more by changes in domestic factors, particularly money supply. Specifically, we note that money supply exerts a positive effect on the stock prices in the short run. However, money supply and stock prices are negatively associated in the long run. We also observe the negative effects of depreciation shocks on stock prices. Other selected notable results are: the stock prices contain valuable information for future variations in macroeconomic variables especially the price level; currency depreciation is both contractionary and inflationary; the Malaysian monetary authorities seem to focus mainly on stabilizing the exchange rate; and the money supply seems to be pro-cyclical and inflationary. One important policy implication is that the monetary authorities should be very cautious in implementing exchange rate and monetary policies as they may have adverse repercussions on the Malaysian financial market.

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Bibliographic Info

Article provided by IIUM Journal of Economis and Management in its journal IIUM Journal of Economics and Management.

Volume (Year): 9 (2001)
Issue (Month): 2 (December)
Pages: 141-164

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Handle: RePEc:ije:journl:v9:y:2001:i:2:p:141-164

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Keywords: Stock price behavior; Macroeconomic variables; Vector autoregression;

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  1. Gjerde, Oystein & Saettem, Frode, 1999. "Causal relations among stock returns and macroeconomic variables in a small, open economy," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(1), pages 61-74, January.
  2. Park, Kwangwoo & Ratti, Ronald A, 2000. "Real Activity, Inflation, Stock Returns, and Monetary Policy," The Financial Review, Eastern Finance Association, vol. 35(2), pages 59-77, May.
  3. Cheung, Yin-Wong & Lai, Kon S., 1993. "Long-run purchasing power parity during the recent float," Journal of International Economics, Elsevier, vol. 34(1-2), pages 181-192, February.
  4. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  5. Khil, Jaeuk & Lee, Bong-Soo, 2000. "Are common stocks a good hedge against inflation? Evidence from the Pacific-rim countries," Pacific-Basin Finance Journal, Elsevier, vol. 8(3-4), pages 457-482, July.
  6. David A. Dickey & Dennis W. Jansen & Daniel L. Thornton, 1991. "A primer on cointegration with an application to money and income," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 58-78.
  7. Lastrapes, William D. & Koray, Faik, 1990. "International transmission of aggregate shocks under fixed and flexible exchange rate regimes: United Kingdom, France, and Germany, 1959 to 1985," Journal of International Money and Finance, Elsevier, vol. 9(4), pages 402-423, December.
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Cited by:
  1. Margaret N. Okoli, 2012. "Return-Volatility Interactions in the Nigerian Stock Market," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 2(2), pages 389-399, June.
  2. ALAM Nafis & TAN Ee Chain, 2012. "Impact Of Financial Crisis On Stock Returns: Evidence From Singapore," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 7(2), pages 5-19, August.
  3. Buerhan Saiti & Azlan Ali & Naziruddin Abdullah & Sulaiman Sajilan, 2014. "Palm Oil Price, Exchange Rate, and Stock Market: A Wavelet Analysis on the Malaysian Market," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 2(1), pages 13-27.
  4. Albaity, Mohamed Shikh, 2011. "Impact of the monetary policy instruments on Islamic stock market index return," Economics Discussion Papers 2011-26, Kiel Institute for the World Economy.

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