Munich Personal RePEc Archive

The Impact of Crude Oil Price on Macroeconomic Variables: New Evidence from Malaysia

Abdullah, Ahmad Monir and Masih, Abul Mansur M. (2014): The Impact of Crude Oil Price on Macroeconomic Variables: New Evidence from Malaysia.

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Abstract

An understanding of how volatilities of and correlations between crude oil and macroeconomic variables change over time including their directions and size is of crucial importance for both the domestic and international investors with a view to diversifying their portfolios for hedging against unforeseen risks. This paper is a humble attempt to add value to the existing literature by empirically testing for the ‘time-varying’ and ‘scale dependent’ correlations between selected commodities and selected macroeconomic variables taking Malaysia as a case study. Particularly, by incorporating the scale dependence, it is possible to identify unique portfolio diversification opportunities for different set of investors bearing different investment horizons or stock-holding periods. Our findings tend to suggest that there is a theoretical relationship between the selected macroeconomic variables and the selected commodities and that the crude oil, gold, KLCI, CPI, BLR and T-bill are exogenous but the corn, industrial production and M2 are endogenous. Consistent with these results, our analysis based on the application of Generalised variance decompositions (VDCs) tends to indicate that the gold commodity is the most exogenous variable that drives the other commodities and the Malaysian macroeconomic variables. Finally, the value added stemming from the findings of Continuous Wavelet Transformation (CWT) tends to indicate that an investor who has exposure in crude oil commodity and wants to invest in KLCI, industrial production and treasury bill in Malaysia, should not hold his/her portfolio for more than 8 months in order to obtain diversification benefit.

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