CO-MOVEMENT AND CAUSAL RELATIONSHIP BETWEEN STOCK MARKET AND MACROECONOMIC VARIABLES: LATEST EVIDENCE FROM MALAYSIA

Abstract

Previous studies pertaining to the co-movement and causal relationship between Malaysian stock markets and domestic macroeconomic variables are by now quite well documented. Nonetheless, to the best of authors’ knowledge, there is a void in the literature about foreign macroeconomic variables. Therefore, this paper aims to examine co-movement and causal relationship between FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBMKLCI) with foreign macroeconomic variables namely world crude oil price, gold price, and five world major stock market indices; Singapore’s Straits Times Index (STI), Chinese Shanghai A-Share Index (SHAI), the US’s Dow Jones Industrial Average (DJIA), Hong Kong’s Hang Seng Index (HSI) and Japanese Nikkei 225 Index (NIK). We also include domestic macroeconomic variables namely private sector domestic credit, gross international reserves and foreign currency assets, and an exchange rate of Malaysian ringgit (MYR) to the US dollar (USD) in this study. Using 9-year monthly data series from 2010 to 2018, the Augmented Dickey-Fuller (ADF) test reveals that data series have unit root in level order, but become integrated when converted into the first difference. The t-statistics of the Trace test suggests that FBMKLCI co-moves with Malaysian gross international reserves and foreign currency assets, world gold price and STI in the long run, respectively. Further, the VECM notes the absence of long-run or short runs causal relationships except Singapore’s STI to FBMKLCI in the short run. The pairwise Granger causality test indicates a one-way causal relationship running from FBMKLCI to gross international reserves and foreign currency assets. The findings benefit stock market investors, diversified portfolio fund managers, market regulators, and policymakers besides enriching the existing literature.