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Impact of capital control measures on the Malaysian stock market

Listed author(s):
  • Mala Raghavan

Purpose - The purpose of this paper is to examine the extent to which the capital control measures implemented by the Malaysian central bank in late 1998 had an influence on segmenting the Malaysian equity market from other major equity markets. Design/methodology/approach - The S&P 500, the Nikkei 225 Index, the STI Index and the KLSE Composite Index are considered. The discrete wavelet transform technique – “Haar” is employed to decompose the series into various time scales during the pre- and post-capital control periods in Malaysia. The decomposed series are then used to estimate the interdependence between KLSE Composite Index with the other three markets at various time scales. Findings - The empirical findings support three conclusions. First, in the pre-capital control period, Singapore is the most influential market followed by the US across all time scales in transmitting news into Malaysia. Second, after the imposition of capital controls, the spillover effects from Singapore to Malaysia have declined substantially, suggesting a reduced integration between these two markets. Finally, in the post-capital control period, all three markets appear to be imparting a similar but moderate level of influence on the Malaysian market. Research limitations/implications - To explore the return and volatility spillovers, the use of return and volatility series at different time scales provided a greater level of insight into the dynamics than the standard approaches which employ only one series in the time domain. Originality/value - The results from this paper will have potential implications for asset allocation, the pricing of domestic securities, the implementation of global hedging and trading strategies and the evaluation of regulatory proposals to restrict international capital flows.

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Article provided by Emerald Group Publishing in its journal International Journal of Managerial Finance.

Volume (Year): 6 (2010)
Issue (Month): 2 (April)
Pages: 116-127

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Handle: RePEc:eme:ijmfpp:v:6:y:2010:i:2:p:116-127
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  1. repec:ebl:ecbull:v:3:y:2004:i:44:p:1-14 is not listed on IDEAS
  2. Ramsey James B. & Lampart Camille, 1998. "The Decomposition of Economic Relationships by Time Scale Using Wavelets: Expenditure and Income," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 3(1), pages 1-22, April.
  3. Eun, Cheol S. & Shim, Sangdal, 1989. "International Transmission of Stock Market Movements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(02), pages 241-256, June.
  4. Ramsey, James B. & Lampart, Camille, 1998. "Decomposition Of Economic Relationships By Timescale Using Wavelets," Macroeconomic Dynamics, Cambridge University Press, vol. 2(01), pages 49-71, March.
  5. Robert F. Engle & Victor K. Ng, 1991. "Measuring and Testing the Impact of News on Volatility," NBER Working Papers 3681, National Bureau of Economic Research, Inc.
  6. Ramsey, James B. & Zhang, Zhifeng, 1997. "The analysis of foreign exchange data using waveform dictionaries," Journal of Empirical Finance, Elsevier, vol. 4(4), pages 341-372, December.
  7. Sang W. Kim & John H. Rogers, 1995. "International stock price spillovers and market liberalization: evidence from Korea, Japan, and the United States," International Finance Discussion Papers 499, Board of Governors of the Federal Reserve System (U.S.).
  8. Hahn Shik Lee, 2004. "International transmission of stock market movements: a wavelet analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 11(3), pages 197-201.
  9. Mehmet Dalkir, 2004. "A new approach to causality in the frequency domain," Economics Bulletin, AccessEcon, vol. 3(44), pages 1-14.
  10. Gencay, Ramazan & Selcuk, Faruk & Whitcher, Brandon, 2005. "Multiscale systematic risk," Journal of International Money and Finance, Elsevier, vol. 24(1), pages 55-70, February.
  11. Koutmos, Gregory & Booth, G Geoffrey, 1995. "Asymmetric volatility transmission in international stock markets," Journal of International Money and Finance, Elsevier, vol. 14(6), pages 747-762, December.
  12. Viviana Fernandez, 2004. "Detection of Breakpoints in Volatility," Documentos de Trabajo 194, Centro de Economía Aplicada, Universidad de Chile.
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