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The Macroeconomic Determinants of Stock Market Development: Evidence from Malaysia

Ho, Sin-Yu (2017): The Macroeconomic Determinants of Stock Market Development: Evidence from Malaysia.

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Abstract

This study examines the macroeconomic determinants of stock market development in Malaysia during the period 1981-2015. Specifically, it examines the impact of banking sector development, economic performance, inflation rate, foreign direct investment and trade openness on the development of Malaysian stock market. Currently, while theoretical and empirical literature presents diverse views on the relationship between each macroeconomic determinant and stock market development, no studies have been conducted with particular reference to the Malaysian stock market. Given the significant role the Malaysian stock market plays among the ASEAN 5, there is a need for more understanding of the impacts of macroeconomic factors on its development. This paper contributes to the existing literature by investigating the macroeconomic determinants of stock market development in Malaysia using the ARDL bounds testing procedure. The results find that economic performance and trade openness have positive long-run impacts, whereas banking sector development has a negative long-run impact on stock market development. In the short run, the results find that the previous period of banking sector development, and the current and previous periods of trade openness have positive impacts on stock market development, whereas inflation rate exerts a negative impact. These findings carry important policy implications.

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