Macroeconomic variables and stock markets (domestic and foreign): evidence from Malaysia

Sulaiman, Nadzri and Masih, Mansur (2017): Macroeconomic variables and stock markets (domestic and foreign): evidence from Malaysia.

Abstract

The growing literature on the relationship between Malaysia’s macroeconomic variables and its relation to the performance of Kuala Lumpur Composite Index (KLCI) is well documented. The aim of this term paper is to extend the existing literature by using selected macroeconomic variables and also, include the external variables i.e. the performance of other stock markets around the world namely, United Kingdom’s Financial Times Index, United States Dow Jones Index, Singapore Straits Times Index, and Japan Nikkei Index into the equation. Thus, this paper will provide an analysis on the cointegration relationships among these variables (internal and external) in the long-run by using the standard time series techniques. The result indicates that stock exchanges are a cointegrated market and that there is a long run theoretical relationship among all the selected variables. The variance decomposition analysis tends to reveal that the Malaysian stock market is driven mostly by the exchange rate followed by the stock markets of Singapore and Japan.The results have strong policy implications.

• Item Type: MPRA Paper
• Language: English
• Keywords: stock market returns(domestic and foreign), macroeconomic variables, VECM, VDC, Malaysia
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

References

Aisyah, A.R., Sidek, N. and Fauziah, H.T. (2009), Macroeconomic determinants of Malaysian Stock Market, African Journal of Business Management, 3(3), 95 -106.

Chen, N., Roll, R., and Ross, S. (1986), Economic forces and the stock market, Journal of Business, 59(3), 83-103.

Cochrane, J. (1991), Production-based Asset Pricing and the Link between Stock Return and Economic Fluctuations, Journal of Finance, 46, 209-238.

Engle, R., and Granger, C. (1987), Cointegration and error correction representation, estimation and testing, Econometrica,, 55(2), 251-276

Fama E. and French, K. (1989), Business Conditions and the Expected Returns on Stocks and Bonds, Journal of Financial Economics, 25, 23-49.

Fama, E. (1986). Term premiums and default premiums in money markets. Journal of Financial Economics, 17, 175-196.

Hussin, M., Muhammad, F., Abu, M. and Awang, S. (2012), Macroeconomic Variables and Malaysian Islamic Stock Market: A time series analysis, Journal of Business Studies Quarterly, 3(4), 1-13

Islam, M. (2003), “The Kuala Lumpur stock market and economic factors: a general-to-specific error correction modeling test”, Journal of the Academy of Business and Economics, 1(1), 37 -47.

Johansen, S and K. Juselius (1990), Maximum Likelihood Estimation and Inferences on Cointegration With Application to The Demand For Money, Oxford Bulletin of Economics and Statistics, 52, 169-210.

Kwon, C. and Shin, T. (1999), Cointegration and Causality Between Macroeconomic Variables and Stock Market Returns, Global Finance Journal, 10(1), 71- 81.

Masih, R. and Masih, A. M. M.(1996), Macroeconomic Activity Dynamics and Granger Causality: New Evidence from a Small Developing Economy Based on a Vector Error-Correction Modelling Analysis, Economic Modelling, 13(3), 407-426.

Maysami, R. & Koh, T. (2000), A Vector Error Correction model of the Singapore stock market, International Review of Economics and Finance, 9(1),79-96.

Maysami, R. & Sim, H. (2002), Macroeconomics variables and their relationship with stock returns: error correction evidence from Hong Kong and Singapore, The Asian Economic Review, 44(1), 69-85.

Mukherjee, T. and Naka, A. (1995), Dynamic Relationship between Macroeconomic Variables and The Japanese Stock Market: An Application of a Vector Error Correction Model, The Journal of Financial Research, 18(2), 223-237.

Pesaran , M. and Timmermann, A. (1995), Predictability of Stock Returns: Robustness and Economic Significance, Journal of Finance, 50(4), 1201-1228.