DYNAMIC INTERACTIONS AMONG MACROECONOMIC VARIABLES, FOREIGN EXCHANGE RATES AND STOCK PRICES IN MALAYSIA: AN INVESTIGATION ON SECTOR INDICES
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Date
2008-05
Authors
FONG, NG KIM
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Abstract
Asset and security prices are generally believed to be determined by some factors
that include political environment as well as monetary and fiscal variables. This dissertation
investigates dynamic linkages between Malaysian stock market represented by the Kuala
Lumpur Composite Index (KLCI) and five macroeconomic variables namely Average
Lending Rate (ALR), Narrow Money Supply (M1), Crude Tapis Oil Price (OIL), value of
Exports in RM/million (EXPT) and foreign exchange rate of Malaysian Ringgit per hundred
unit Japanese Yen (JPY) and per unit US Dollar (USD).
Dynamic interactions between foreign exchange rates are also examined. The
selected exchange rates of Malaysian Ringgit (MYR) against forei'gn currencies include
Australian Dollar (AUD), the European Community exchange rate, the Eut6 (EUR), Great
Britain Pound sterling (GBP), Japanese Yen (JPY) and Singaporean Dollar (SGD).
Furthermore, linkages between three sektor indices; Kuala Lumpur Finance Index (KLFI),
Kuala Lumpur Property Index (PRPT) and Kuala Lumpur Plantation Index (KLPI) with
ALR, OIL and JPY are also analyzed.
Monthly data from January 1997 to September 2007 are used, except for the Euro
and USD that start in January 1999 and July 2005 respectively. The analyses are also
conducted for three sub-samples; Asian Financial Crisis Period, Recovery Period and RMunpegged
Period. The methodologies employed are well accepted, widely used and standard
econometric procedures: unit root tests, cointegration test and innovation accounting
analyses based on the Vector Autoregression (V AR) model. Impulse response function (IRF)
and variance decomposition (VD) are used to investigate the dynamic interactions and
strength of causal relations among the variables beyond the sample period.
Unit root tests suggest that generally all variables are stationary at the first difference.
Analyses using cointegration test show that there exists a long-run relationship between
KLCI and macroeconomic variables for each of the sample periods. Generally, KLCI
responds positively and significantly to Ml and EXPT while KLCI shows negative response
to changes in ALR and JPY. Surprisingly, KLCI does not respond significantly to OIL
despite being an oil exporting country. Variance decomposition analysis shows that KLCI is
mostly affected by its own innovations in the whole sample while largely explained by
changes in the exchange rate in most sub-samples.
From the results of cointegration test, all the exchange rates are not cointegrated in
the whole sample period but cointegrated in all the sub-sample periods. Although exchange
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rates are not cointegrated in the whole sample, the result of IRF shows that SGD responds
and affects positively and significantly with other exchange rates. The vif ~nalysis shows
that the changes in SGD are largely explained by innovations in itself. Surprisingly, changes
in SGD also explain sizeable proportion of changes in other exchange rates.
Empirical results indicate that sector indices are cointegrated with macroeconomic
variables, except for the KLFI and PRPT during the Asian Financial Crisis Period. As found
in the IRF analysis, sector indices generally respond negatively to ALR and JPY and show
positive, although not significant, response to OIL. The results of VD analysis show that a
large percentage of ALR contributes to variations in KLFI and KLPI while PRPT is mostly
influenced by fluctuations in itself during the whole sample period. The results of IRF and
VD above hold to certain extend in the sub-sample periods.
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Keywords
DYNAMIC INTERACTIONS AMONG MACROECONOMIC VARIABLES, FOREIGN EXCHANGE RATES AND STOCK PRICES IN MALAYSIA