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Effects of Macroeconomic Variables on Stock Prices in Malaysia: An Approach of Error Correction Model

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  • Asmy, Mohamed
  • Rohilina, Wisam
  • Hassama, Aris
  • Fouad, Md.
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    Abstract

    This paper attempts to examine the short-run and long-run causal relationship between Kuala Lumpur Composite Index (KLCI) and selected macroeconomic variables namely inflation, money supply and nominal effective exchange rate during the pre and post crisis period from 1987 until 1995 and from 1999 until 2007 by using monthly data. The methodology used in this study is time series econometric techniques i.e. the unit root test, cointegration test, error correction model (ECM), variance decomposition and impulse response function. The findings show that there is cointegration between stock prices and macroeconomic variables. The results suggest that inflation, money supply and exchange rate seem to significantly affect the KLCI. These variables considered to be emphasized as the policy instruments by the government in order to stabilize stock prices.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 20970.

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    Date of creation: 27 Apr 2009
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    Handle: RePEc:pra:mprapa:20970

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    Keywords: Kuala Lumpur Stock Exchange; Money Supply; Nominal Effective Exchange Rate; ECM;

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    1. Orawan Ratanapakorn & Subhash Sharma, 2007. "Dynamic analysis between the US stock returns and the macroeconomic variables," Applied Financial Economics, Taylor & Francis Journals, vol. 17(5), pages 369-377.
    2. Willem Thorbecke, 1995. "On Stock Market Returns and Monetary Policy," Economics Working Paper Archive wp_139, Levy Economics Institute.
    3. Michael Adebayo Adebiyi, 2007. "Does Money Tell Us Anything About Inflation In Nigeria?," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 52(01), pages 117-134.
    4. 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.
    5. Osamah M. Al-Khazali & Chong Soo Pyun, 2004. "Stock Prices and Inflation: New Evidence from the Pacific-Basin Countries," Review of Quantitative Finance and Accounting, Springer, vol. 22(2), pages 123-140, 03.
    6. Fifield, S G M & Power, D M & Sinclair, C D, 2002. "Macroeconomic Factors and Share Returns: An Analysis Using Emerging Market Data," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 7(1), pages 51-62, January.
    7. K. Chaudhuri & S. Smiles, 2004. "Stock market and aggregate economic activity: evidence from Australia," Applied Financial Economics, Taylor & Francis Journals, vol. 14(2), pages 121-129.
    8. Kwon, Chung S. & Shin, Tai S., 1999. "Cointegration and causality between macroeconomic variables and stock market returns," Global Finance Journal, Elsevier, vol. 10(1), pages 71-81.
    9. Jin-Gil Jeong & Philip Fanara & Charlie Mahone, 2002. "Intra- and inter-continental transmission of inflation in Africa," Applied Financial Economics, Taylor & Francis Journals, vol. 12(10), pages 731-741.
    10. Nasseh, Alireza & Strauss, Jack, 2000. "Stock prices and domestic and international macroeconomic activity: a cointegration approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 40(2), pages 229-245.
    11. Mukherjee, Tarun K & Naka, Atsuyuki, 1995. "Dynamic Relations between Macroeconomic Variables and the Japanese Stock Market: An Application of a Vector Error Correction Model," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 18(2), pages 223-37, Summer.
    12. Nieh, Chien-Chung & Lee, Cheng-Few, 2001. "Dynamic relationship between stock prices and exchange rates for G-7 countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(4), pages 477-490.
    13. Theophano Patra & Sunil Poshakwale, 2006. "Economic variables and stock market returns: evidence from the Athens stock exchange," Applied Financial Economics, Taylor & Francis Journals, vol. 16(13), pages 993-1005.
    14. W N W Azman-Saini & M S Habibullah & Siong Hook Law & A M Dayang-Affizzah, 2007. "Stock Prices, Exchange Rates and Causality in Malaysia: A Note," The IUP Journal of Financial Economics, IUP Publications, vol. 0(1), pages 7-13, March.
    15. Andreas Humpe & Peter D. Macmillan, 2005. "Can macroeconomic variables explain long term stock market movements? A comparison of the US and Japan," CRIEFF Discussion Papers 0511, Centre for Research into Industry, Enterprise, Finance and the Firm.
    16. Maysami, Ramin Cooper & Koh, Tiong Sim, 2000. "A vector error correction model of the Singapore stock market," International Review of Economics & Finance, Elsevier, vol. 9(1), pages 79-96, February.
    17. Thomas F. Cosimano & Connel Fullenkamp & Ralph Chami, 1999. "The Stock Market Channel of Monetary Policy," IMF Working Papers 99/22, International Monetary Fund.
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    Cited by:
    1. Abdullah, Ahmad Monir & Saiti, Buerhan & Masih, Abul Mansur M., 2014. "Causality between Stock Market Index and Macroeconomic Variables: A Case Study for Malaysia," MPRA Paper 56987, University Library of Munich, Germany.

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