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Macroeconomic variables and stock return in malaysia

The empirical result revealed that there is a long run and short run relationship between Malaysia stock market return and the determinant factors. Stock Market Returns are the returns that the investors generate out of the stock market. This return could be in the form of profit through trading or in the form of dividends given by the company to its shareholders from time-to-time.

Stock market is a suitable medium for investors to avoid the threat of inflation and at the same time is an indicator towards the development of the nation in term of economics Khil and Lee, 2000. Indicator, risk, return, efficiency and inter-market dependence deal with important issues pertaining to the Malaysian stock market. It addresses the major consideration in the construction of a stock market index which is used to measure the performance of the overall stock market or a sector of the market.

Modern portfolio theory requires knowledge of the relationship of prices of individual stocks to movements in the market in order to allocate funds realistically among stocks.

Influence of macroeconomic factors on Malaysian stock returns

It has also proved to be of the considerable uses to be analyzed in forecasting the price movements in the future. A massive drop in KLCI was experienced during the third quarter 1998 because of past Asian financial crisis arises. As global financial crisis occurred during the end of 2007 until early of 2008, it caused havoc to the world financial markets. Bursa Malaysia stock market once again without exception experienced KLCI drop from the first quarter 2008 until the fourth quarter 2008 as shown in Figure 1.

Both situations definitely caused the stock market return to fall seriously.

  • The case of the Ghana Stock Exchange;
  • Before Cointegration test can be performed, optimum lag length should be identified to ensure the reliability of result;
  • Macroeconomic variables, firm characteristics and stock returns;
  • Business and Economic Horizons, 2 2 ,
  • Meanwhile, Tarika et al;
  • R is the number of cointegrating relationships and in each column is the cointegrating vector.

Although the financial problems have been resolved, it is essential to examine the determinant factors of macroeconomic variables which influence the stock market return. The importance of such study in comprehending the idea of stock market helps us in handling macroeconomic variables and stock return in malaysia uncertainty and risk as well as possibilities of spreading consumption over time.

It has been supported by Bala and Premaratne 2003 in which an understanding of volatility in stock markets is important for determining the cost of capital and for assessing investment and leverage decisions as volatility is synonymous with risk. The outline of the paper is structured as follow: Section 2 highlights on the empirical literature; Section 3 justifies the data and methodology; Section 4 presents the results and interpretation and finally Section 5 draws a significant conclusion on the topic discussed.

This study explores the interactions between selected macroeconomic variables and stock prices for the case of Malaysia in a VAR framework. The result shows negative association between KLCI and real exchange rate. Their lag exclusion test shows that all six variables contribute significantly to the co-integrating relationship.

This study investigated the impact of macroeconomic variables on Average Share Price ASP and in depth research to determine whether changes in macroeconomic variables explain movements in stock prices in Nigeria. They found that only exchange rate was found to Granger cause ASP in the sample period. They found no long run relationship between stock market return and changes of exchange rates in Malaysia using linear VAR model, but there were evidence of common regime switching behaviour between them.

The estimated non-linear MS-VAR model reveals that in the first regime as the stock price index fall, the exchange rates inflate and in the second regime when the stock price indexes gain, the exchange rates deflate. Thus, they proclaim that regime one captures economic recession during which the stock market crash that lead to appreciation of the local currency exchange rate.

As for regime two, it is associates with the economic boom where the rising of stock market index that lead to depreciation of the local currency exchange rate.

However, some other researchers discovered that there are positive relationship between exchange rate and stock market return. Serkan 2008 had studied the macroeconomic variables, firm characteristics and stock returns evidence from Turkey. The effects of macroeconomic variables on the portfolio returns were evaluated by using OLS.

The results of the OLS estimation in the case of Turkey show a positive relationship as observed between stock returns and exchange rate. The empirical evidence regarding the exchange rate is inconclusive. Thus, a positive relationship between stock return and exchange rate need to observed.

Meanwhile, Tarika et al. According to Mansor 2010 who studied an empirical analysis of real activity and stock returns in an emerging market from 1978. Q4 in Malaysia, there is preliminary correlation analysis that indicates a significant macroeconomic variables and stock return in malaysia correlation between current and once-lagged stock price changes and subsequent GDP growth rates up to 4-quarter horizon. Despite positive, the correlations turn insignificant beyond one year-period.

These statistics are thus suggestive of the potential role of the Malaysian stock market as a predictor for future real output growth which is limited only for short run forecasts. Furthermore, Serkan 2008 had studied about macroeconomic volatility and stock market volatility, worldwide. The study was done in terms of stock market and fundamental volatility using underlying annual data, 1983-2002.

They had provided evidence in the result that revealed a clear positive relationship between stock return and GDP volatilities. The results also show that India and Pakistan have very low initial GDP per capita and relatively low stock market. An economic theory suggests that short term and long term interest rate have negative impact.

  1. The outline of the paper is structured as follow. This indicates that the stock price reacts to the past information for those variables.
  2. A massive drop in KLCI was experienced during the third quarter 1998 because of past Asian financial crisis arises. This shows that Malaysia stock market is sensitive to the changes in the macroeconomic variables.
  3. The figure in parenthesis....
  4. Macroeconomic variables and Malaysia Islamic stock market.

According to Aisyah et al. An increase in interest rate by one point brings down KLCI by 0. Serkan 2008 also discovered the negative relationship between stock returns and interest rate. This indicates that interest rate represents alternative investment opportunities. As the interest rate rises, investors tend to invest less in stocks, causing stock prices to fall. Besides, Ologunde et al. They used the ordinary least-square OLS regression method and they found that the prevailing interest rate exerts positive influence on stock market capitalization rate.

The reason for this relationship lies in the fact that investors are willing and will always commit their fund invest in businesses with good profit and quick turnover while taking less risk. Prior to that, that Government development stock rate also exerts negative influence on stock market capitalization rate. Prevailing interest rate exerts negative influence on government development stock rate.

Influence of macroeconomic factors on Malaysian stock returns

The reason is that investors will invest in business with good profit and quick turnover while being risk averse.

Since, as interest is increased; investors will prefer to invest in the banks than to invest in the stock market. Filis 2009 empirically investigated on the relationship between stock market, CPI and industrial production in Greece and the impact of oil prices. The main findings showed that stock market receives negative and significant influence from oil and CPI. Wang 2010 had provided evidence from China on the relationship between stock market volatility and macroeconomic volatility.

The finding revealed the negative relationship between the volatility in the CPI and the stock market. This leads to a fall in the demand for the domestic market and subsequently leads to a reduction in the volume of stock traded. The results also clearly indicate that there is a bilateral causal relationship between inflation volatility and stock market volatility.

Moreover, Serkan 2008 found that inflation and stock return have positive relationship. The researcher found that there is a positive coefficient for the inflation variable in the regression models.

Macroeconomic Variables and Stock Market Returns: Panel Analysis from Selected ASEAN Countries

Their rationale for this pattern is related to the inadequacy of hedging role of stocks against inflation.

This rationale would be suggested for Turkish stock returns that is Turkish stocks cannot be used as hedge against inflation, since positive regression coefficient simply a higher expected return is required for higher inflation rate. Meanwhile, Siti 2003 studied on macroeconomic variables and stock prices in Malaysia by doing an analysis from the period of pre and post July in 1997.

The co-integration and causality Error Correction Model ECM were used in this study, to analyse the dynamic equilibrium in the short run and long-run between macroeconomic variables and the stock prices. In bivariate co-integration test, they found the evidence for the period before financial crisis that the stock market has a long run relationship with M2, RES, CPI and IP regardless of the lag length used. This indicates that the stock price reacts to the past information for those variables.

Nevertheless, there is no cointegrating relationship between RES with stock prices which imply the market is informational efficient with the RES information. The data that is used in this analysis is a series of quarterly period in 16 years, starting from January 1996 to December 2011.

In the first step of the estimation process, the study examines the stationarity properties of the data series. In stationarity time series, stocks will be temporary and over time, their effects will be eliminated as the series revert to their long run mean values. On the contrary, non-stationarity series will contain permanent components Asteriou, 2006. In fact, most of the economic variables show a trend and therefore, most cases are non-stationary.

These non-stationary time series can easily lead to Ordinary Least Square OLS regression to incorrect or bogus conclusions. Thus, a key way to test for non-stationarity is macroeconomic variables and stock return in malaysia test for the existence of unit root. In those cases where the error terms are serially correlated, the method has to be modified. This test for stationary is known as the ADF test. This means that a unit root exists in y t. If the null hypothesis is rejected, then yt is stationary.

The PP test is based on equation 3 but it uses the modified Dickey-Fuller statistics. The PP test could be more robust in the presence of autocorrelation in the data sets. Secondly, a cointegration test is performed to determine the nature of the long run relationship.

Cointegration test is employed to analyze whether the pairs of variables are cointegrated or move jointly. An important prerequisite for the existence of a cointegrating relationship between the variables is they have the same order of integration. This means that if a variable is an integrated of order d, the other variables should also be an integrated of order d.

  • The case of the Ghana Stock Exchange;
  • Both situations definitely caused the stock market return to fall seriously;
  • Moreover, almost the entire sectors had to handle large sell-offs with the index at an all-time low;
  • International Journal of Economics and Finance, 2 2 , 35-42;
  • Thus, a positive relationship between stock return and exchange rate need to observed.

The testing of hypothesis is null for non co-integration against the alternative hypothesis, which means with the existence of co-integration. A previous study on co- integration analysis was done by Engle and Granger 1987. Subsequently, Stock and Watson 1988 and Johansen 1988 extended the research. A brief outline of the Johansen 1988 procedure is given below: R is the number of cointegrating relationships and in each column is the cointegrating vector.

In this study we used Johansen 1995 Max-Eigen and Trace Tests to determine the number of co- integrating relationships between the variables in the bi-variate model. According to Engle Granger 1987if the variables are cointegrated, the relationship between them can be expressed via Error correction Model ECM.

Relationship between Macroeconomic Variables and Malaysia Available Shariah Indices

The ECM detects the long run cointegration relationship in the following form: The coefficient of Error Correction Model includes information about whether the past values of variables affect the current value of the variables under study. The size and statistical significance of the co-efficients of the Error Correction Model measures the tendencies of each variable to return to equilibrium. The short run dynamics are captured through individual co-efficients of the different terms.

Finally, the Granger-causality test is run in this study is to analyze the causality between all variables. Testing causality in the Granger sense, involves using F-tests to test whether lagged information on a variable Y provides any statistically significant information about a variable X in the presence of lagged X.