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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Impulse Response On The Relationship Between Stock Price , Oil Price And Futures: Regional Response Among Asian Equities
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