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

Author

Listed:
  • Asmy, Mohamed
  • Rohilina, Wisam
  • Hassama, Aris
  • Fouad, Md.

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.

Suggested Citation

  • Asmy, Mohamed & Rohilina, Wisam & Hassama, Aris & Fouad, Md., 2009. "Effects of Macroeconomic Variables on Stock Prices in Malaysia: An Approach of Error Correction Model," MPRA Paper 20970, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:20970
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    File URL: https://mpra.ub.uni-muenchen.de/20970/1/MPRA_paper_20970.pdf
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    References listed on IDEAS

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    2. 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.
    3. Thorbecke, Willem, 1997. " On Stock Market Returns and Monetary Policy," Journal of Finance, American Finance Association, vol. 52(2), pages 635-654, June.
    4. 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.
    5. 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.
    6. 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.
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    Cited by:

    1. repec:hur:ijarbs:v:7:y:2017:i:6:p:1004-1011 is not listed on IDEAS
    2. 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.

    More about this item

    Keywords

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

    JEL classification:

    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • A10 - General Economics and Teaching - - General Economics - - - General

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