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

Asmy, Mohamed and Rohilina, Wisam and Hassama, Aris and Fouad, Md. (2009): Effects of Macroeconomic Variables on Stock Prices in Malaysia: An Approach of Error Correction Model.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Kuala Lumpur Stock Exchange, Money Supply, Nominal Effective Exchange Rate, ECM
• Subjects: A - General Economics and Teaching > A1 - General Economics > A12 - Relation of Economics to Other Disciplines; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; A - General Economics and Teaching > A1 - General Economics > A10 - General

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