Impulse Response On The Relationship Between Stock Price, Oil Price And Futures: Regional Response Among Asian Equities
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Date
2007-06
Authors
SHEAU TYNG, CHAN
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Abstract
It is widely known that the performance of a particular stock market is affected
by various factors, particularly macroeconomic variables. This dissertation investigates
long run and short run relationship between Malaysia stock market, represented by
Kuala Lumpur Composite Index (KLCI) and six macroeconomic variables such as
Consumer Price Index (Cpn, KLCI Futures (FUT), Money Supply (Ml), Tapis Crude
Oil Price (OIL), Pound Sterling Exchange Rate (STG) and Treasury Bills Rate (TBR).
In addition, dynamic linkages among selected Asian Stock Indices are also investigated.
The selected indices are KLCI (Malaysia), Bombay Stock Exchange (BSE - India),
Hang Seng Index (HSI - Hong Kong), Nikkei 225 Stock Average (NIK - Japan),
Shanghai Composite Index (SSE -.~hina) and Straits Times Index (STI - Singapore).
Furthermore, the robustness of dynamic linkages between stock· price and
macroeconomic variables is also investigated.
The analyses applied standard and well accepted techniques of unit root test,
cointegration test and analysis on V AR model. Impulse response and variance
decomposition are obtained based on the VAR model. Monthly data from January 1996
to September 2006 are used. For the first objective, the data is further divided into two
sub-samples: Asian Financial Crisis Period and Recovery Period. Unit root test suggests
that all the variables are stationary at the first difference. Cointegration analysis '·shows
that there exists a long run relationship between KLCI and macroeconomic·variables for
each of the sub-sample. Cointegration equations suggest lhat KLCI, in the long-run,
consistently has a positive relationship with FUT and M 1 '.'.'hile the price is negatively
related to CPI.
Generally, KLCI responds positively and significantly to shocks in FUT, Ml
and CPI whereas STG and TBR show immediate and negative responses to shocks in
KLCI. As expected, the responses among the variables during the Asian Financial Crisis
period are very much different to those for the whole sample al1d Recovery Period. The
result from variance decomposition analyses suggests the relative leading role of the oil
price during the two sub-sample periods.
According to the empirical result of cointegration analysis, KLCI is positively .
related to BSE, NIK and HSI in the long run. The V AR result suggests that STI and HSI
are more influential than KLCI. Thefesults of variance decomposition show that STI,
HSI and SSE contribute a relatively large proportion of variations in KLCI. In addition,
in the long run, market changes in India contribute significantly on variations in the rest
Asian stock markets. Sensitivity analysis shows the interaction between KLCI and each
macroeconomic variable are not robust to different model with different set of variables.
In general, KLCI is not informationally efficient as future price can be predicted using
changes in other indices as well as changes in macroeconomic variables.
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Keywords
Impulse Response On The Relationship Between Stock Price , Oil Price And Futures: Regional Response Among Asian Equities