The Relationship Between Volatility of Malaysia Stock Price and the Volatility of Macroeconomic Variables for Five Asian Countries

The rapid liberalization and globalization of the financial market around the world has been recognized causes to the higher volatility between macroeconomic variables and stock market. Stock market is one of the macro economy variables and as a leading indicator for economy plays an important role in the development of any country. Despite the importance of the establishing of the relationship between macroeconomic variables and stock prices, there is still no general rule or consensus for both theoretical and empirical literature either in emerging, developed, Asian and Europe economies.
This thesis attempts to analyze the relationship between volatility of Malaysian stock price and the volatility of macroeconomic variables namely exchange rates, money supply and interest rates for Singapore, Philippine, Thailand, Japan and China from January 2000 until December 2010. All previous studies examined the relationship between macroeconomic variables and stock market in a particular country. It is also interesting and beneficial to study the relationship of Malaysian stock market with other countries macroeconomic factors such as exchange rates, money supply and interest rates. Several tests are used in this study namely Unit Root Tests, Multivariate Cointegration Test, Error Correction Model and Estimation Equation Analysis. Augmented Dickey-Fuller (ADF) test and Phillips-Perron (1988) test are used to ensure all variables are stationary. The other techniques are used to identify short-run and long-run relationship between volatility of Malaysian stock price and macroeconomic variables of five Asian countries and also to determine which country macroeconomic variables give the most impact on Malaysian stock price. The study finds that there exist short run cointegrating link or relationship between macroeconomic variables and Malaysian stock price. The empirical findings reveal that relationship between macroeconomic variables and Malaysian stock price do form a long run cointegrating link or relationship. From the result shows that exchange rate from China gives the most impact on Malaysian stock price. Policy-makers need to be careful when trying to influence the economy through changes in macroeconomic variables such as the money supply, interest rates or the exchange rate. They may inadvertently depress the stock market and curtail capital formation which itself would lead to further slowdown of the economy.