Impact of Interest Rate and Exchange Rate on the Stock Market Index in Malaysia: A Cointegration Analysis
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Date
2009-05
Authors
Thang, Foo Zor
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Abstract
This paper examines empirically the nature of the impact of the exchange rate and interest
rate on Malaysia stock market index. Stock market performance can act as the barometer of
1e economy as a whole. Prior to testing for cointegration, Augmented Dickey Fuller (ADF)
nit root test is performed. All the variables in our study are stationary at first difference, that
s I(l) variables. Johansen Juselius (JJ) cointegration test, Vector Error Correction Model
VECM) and Granger Causality test were applied to search for the long run and short-run
mpacts respectively. The test results conform to a priori expectations. The interest rate and
he exchange rate have negative impact on the stock market index in the long run as well as
he short run. The results provide some useful insights into the effects of interest rate and
:xchange rate on the stock market index in Malaysia. Our findings can help the policy makers
n decision on planning as well as investors in decision on portfolio investment
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Keywords
Stock Market