Relationship Between Stock Market Development And Growth Economics Essay

When a alteration occurs in stock market, there is an of import deduction on a countrys economic system as this serves as a prima index of the economic system. Conversely, it is besides true that alterations in the economic system do hold an consequence on the stock market.

A relationship bing between stock market development and growing of the economic system and stock monetary values is by and large believed to be determined by some cardinal macroeconomic variables such as involvement rate, rising prices, along with money supply. Empirical groundss have shown that alterations in stock monetary values are linked with macroeconomic behavior in advanced states ( Muradoglu et al. , 2000 ; Diacogiannis et al. , 2001 ; Wongbampo and Sharma, 2002 ; Mukhopadhyay and Sarkar, 2003 ; Gan et al. , 2006 ; Robert, 2008 ) inter alia.

The relation between the stock market and macroeconomic forces has been widely analyzed in finance and macroeconomic literature. The linkages between equity monetary values and macroeconomic variables such as existent economic activity, money supply, rising prices rates, involvement rate and exchange rates are of important importance in analysing equity returns in relation to portfolio investing.

Many research workers have concurred that macroeconomic variables have a important part in finding stock public presentation.

An exemplifying list of surveies includes Fama ( 1981 ) ; Friedman ( 1988 ) ; Chen ( 1991 ) ; Mukherjee and Naka, ( 1995 ) ; Nasseh and Strauss ( 2000 ) ; Tatom ( 2002 ) , Hope and Kang ( 2005 ) . They discovered the important effects on the stock monetary values by alterations in macroeconomic conditions.

The consequences from earlier surveies besides point out that plus monetary values sensitively react to macroeconomic intelligence. Research workers believed that assorted forms of stock monetary value activities are due to dissimilar outlooks among investors towards future hard currency flows every bit good as different degrees of price reduction rate for their investing. They wrapped up that macroeconomic fluctuation is considered as a important factor in explicating stock monetary value motions.

Changes in macroeconomic basicss that could hold different effects on sector specific index have non been discussed in most of the old surveies. Study such as Geske and Roll ( 1983 ) ; Chen, Roll and Ross ( 1986 ) ; Keraney and Daly ( 1998 ) ; Fifield, Power and Sinclair ( 2000 ) ; Panetta ( 2002 ) ; Masayami and Sim ( 2002 ) ; Christopher, Minsoo, Hua and Jun ( 2006 ) are more disquieted with the aggregative stock market index as the measuring for the overall public presentation of the stock market alternatively of single sector-specific indices in their analyses. Besides that, the survey on the motions of sector-specific indices is still losing. It is expected that the alterations in macroeconomic variables would bring forth different effects on stock market.

Although there have been a figure of recognized groundss which examined the relationship between macroeconomic factors and stock return in developed market, small attempt appears to hold been made to document whether a similar relation is besides true in less institutionally advanced states like Malaysia.

In the Malayan context, Ibrahim ( 2000 ) , Ibrahim and Aziz ( 2003 ) and Janor et Al. ( 2005 ) examined the self-motivated dealingss between stock return and economic activities withassumption that the stock market leads the motion of macroeconomic variables. In contrast, this survey aims to analyze the determiners of the stock market behaviour in Malaysia alternatively of the prognostic function of the stock market itself. It is hoped that the determination of this survey would supply some meaningful penetrations to the organic structure of cognition, policy shapers every bit good as the practicians.

For the academic field, the consequences from this survey should enable to constructing up the theoretical model of the determiners of stock market motion from the position of developing economic systems like Malaysia.

Last but non least, by which macroeconomic variables affect the stock market the most, both the personal and corporate investors would be able to proactively strategize their investings harmonizing to the alteration of the pecuniary policy.

Apart from utilizing the latest informations, we employ different macroeconomic variables that are considered as most relevant in the Malayan context.

Therefore, there is a demand for such survey is conducted in Malaysia in order to analyze the relationship between macroeconomic factors and stock returns.

The followers are the definition of several macroeconomic variables footings:

Industrial Production

A step of alterations in end product for the industrial sector of the economic system. The industrial sector includes fabrication, excavation, and public-service corporations. Although these sectors contribute merely a little part of GDP ( Gross Domestic Product ) , they are extremely sensitive to involvement rates and consumer demand. This makes Industrial Production an of import tool in calculating future GDP and economic public presentation. Industrial Production figures are besides used by cardinal Bankss to mensurate rising prices, as high degrees of industrial production can take to uncontrolled degrees of ingestion and rapid rising prices.

Money Supply

Entire sum of money available in an economic system at a peculiar point in clip. Money supply informations are recorded and published, normally by the authorities or the cardinal bank of the state. Public and private sector analysts have long monitored alterations in money supply because of its possible effects on the monetary value degree, rising prices and the concern rhythm.

There is strong empirical grounds of a direct relation between long-run monetary value rising prices and money-supply growing, at least for rapid additions in the sum of money in the economic system.

In add-on to some economic experts seeing the cardinal bank ‘s control over the money supply as weak, many would besides state that there are two weak links between the growing of the money supply and the rising prices rate:

First, an addition in the money supply, unless trapped in the fiscal system as extra militias, can do a sustained addition in existent production alternatively of rising prices in the effects of a recession, when many resources are underutilized.

Second, if the speed of money, i.e. , the ratio between nominal GDP and money supply, alterations, an addition in the money supply could hold no consequence, or an unpredictable consequence on the growing of nominal GDP.

Inflation

In economic sciences, rising prices is a rise in the general degree of monetary values of goods and services in an economic system over a period of clip. When the general monetary value degree rises, each unit of currency bargains fewer goods and services. Inflation ‘s effects on an economic system are many and can be at the same clip positive and negative.

Negative effects of rising prices include a lessening in the existent value of money and other pecuniary points over clip, uncertainness over future rising prices may deter investing and nest eggs, and high rising prices may take to deficits of goods if consumers begin notice out of concern that monetary values will increase in the hereafter. Positive effects include guarantee cardinal Bankss can set nominal involvement rates and promote investing in non-monetary capital undertakings.

Stock Return

It is the capital addition or loss in a peculiar period. The return consists of the income and the capital additions relative on an investing. It is normally quoted as a per centum.

1.2 BACKGROUND

Economy of Malaysia

Since it became independent in 1957 ; Malaysia ‘s economic record has been one of Asia ‘s best. Real gross domestic merchandise ( GDP ) grew by an norm of 6.5 % per twelvemonth from 1957 to 2005. Performance peaked in the early 1980s through the mid-1990s, as the economic system experienced sustained rapid growing averaging about 8 % yearly. High degrees of foreign and domestic private investing played a important function as the economic system diversified and modernized. Once to a great extent dependent on primary merchandises such as gum elastic and Sn, Malaysia today is a middle-income state with a multi-sector economic system based on services and fabrication. Malaysia is one of the universe ‘s largest exporters of semiconducting material devices, electrical goods, solar panels, and information and communicating engineering ( ICT ) merchandises.

Malaysia struggled economically during the 1997-1998 Asiatic fiscal crisis and applied several valuable lessons to its economic direction schemes that contributed to the economic system ‘s resiliency to the 2008-2009 planetary fiscal crisis. GDP contracted 1.7 % in 2009 compared to 4.6 % growing in 2008, but has since rebounded, and is expected to be about 7 % in 2010. Malayan Bankss are good capitalized, cautiously managed, and had no mensurable exposure to the U.S. sub-prime market.

The cardinal bank maintains a conservative regulative environment, holding prohibited some of the riskier assets in trend elsewhere. Malaysia maintains high degrees of foreign exchange militias and has comparatively small external debt.The authorities continues to actively pull off the economic system with state-owned endeavors to a great extent involved in the oil and gas, plantation, ship edifice, steel, telecommunications, public-service corporations, automotive, excavation, and other sectors. Since 1971, cultural penchants have been given to Bumiputras ( cultural Malayans and autochthonal peoples ) by necessitating 30 % Bumiputra ownership in new concerns.

Prime Minister Najib ‘s New Economic Model reform plan includes alterations to modify these cultural penchants and to deprive province endeavors while increasing the private sector ‘s function in exciting higher degrees of investing and hiking GDP growing. The NEM purposes to make a concern environment more contributing to long-run sustained economic growing, development, and investing, with the end of Malaysia going a high-income, developed state by 2020. Malaysia has a managed float currency exchange government. It gives flexibleness for the ringgit to set to planetary economic and fiscal developments and has accorded a degree of stableness against the currencies of Malaysia ‘s major trading spouses.

Economy ( 2009 )

Nominal GDP: $ 191.5 billion.

Annual existent GDP growing rate: 5.9 % ( 2006 ) ; 6.3 % ( 2007 ) ; 4.6 % ( 2008 ) ; -1.7 % ( 2009 ) ; 7.0 % ( authorities estimation for 2010 ) .

Nominal per capita income ( GNI ) : $ 6,897.

Natural resources: Petroleum, liquefied natural gas ( LNG ) , Sn, minerals.

Agricultural merchandises: Palm oil, gum elastic, lumber, chocolate, rice, tropical fruit, fish, coconut.

Industry: Types — electronics, electrical merchandises, chemicals, nutrient and drinks, metal and machine merchandises, dress.

Trade: Merchandise exports — $ 180.8 billion: electronic merchandises, machinery, liquid natural gas, crude oil and crude oil merchandises, telecom equipment. Major markets — Singapore 14.0 % , China 12.2 % , U.S. 11.0 % , Japan 9.8 % . Merchandise imports — $ 142.1 billion: electronic merchandises, machinery, machinery parts and setup, crude oil and crude oil merchandises. Major providers — China 14.0 % , Japan 12.5 % , U.S. 11.2 % , Singapore 11.1 % .

Bursa Malaysia

Bursa Malaysia antecedently known as Kuala Lumpur Stock Exchange ( KLSE, Bursa Saham Kuala Lumpur in Malay ) dates back to 1930 when the Singapore Stockbrokers ‘ Association was set up as a formal organisation trade in securities in Malaya. The first formal securities concern organisation in Malaysia was the Singapore Stockbrokers ‘ Association, established in 1930. It was re-registered as the Malayan Stockbrokers ‘ Association in 1937. The Malayan Stock Exchange was established in 1960 and the public trading of portions commenced. The board system had trading suites in Singapore and Kuala Lumpur, linked by direct telephone lines.

In 1964, the Stock Exchange of Malaysia was established. With the sezession of Singapore from Malaysia in 1965, the Stock Exchange of Malaysia became known as the Stock Exchange of Malaysia and Singapore.

In 1973, currency exchangeability between Malaysia and Singapore ceased, and the Stock Exchange of Malaysia and Singapore was divided into the Kuala Lumpur Stock Exchange Berhad and the Stock Exchange of Singapore. The Kuala Lumpur Stock Exchange, which was incorporated on December 14, 1976 as a company limited by warrant, took over the operations of the Kuala Lumpur Stock Exchange Berhad in the same twelvemonth.

On April 14, 2004, Kuala Lumpur Stock Exchange was renamed Bursa Malaysia Berhad, following the demutualization exercising, the intent of which was to heighten competitory place and to react to planetary tendencies in the exchange sector by doing themselves more customer-driven and market-oriented. It consisted of a Main Board, a Second Board and MESDAQ with entire market capitalisations of MR700billion ( US $ 189 billion ) .

Bursa Malaysia has since so focused on assorted enterprises aimed at bettering its merchandise and service offerings, increasing the liquidness and speed of its markets, bettering the efficiency of its concerns and accomplishing economic systems of graduated table in its operations. On 18 March 2005, Bursa Malaysia was listed on the Main Board of Bursa Malaysia Securities Berhad with a 17 % or RM0.50 premium over its retail monetary value of RM3.00.

KLCI

The Kuala Lumpur Composite Index ( KLCI ) is a stock market index by and large accepted as the local stock market barometer. Introduced in 1986 to reply the demand for a stock market index that would function as an accurate public presentation index of the Malayan stock market every bit good as the economic system.

It is used to be the chief Malaysia stock index, and is now one of the three primary indices for the Malayan stock market. The other two are FMB30 and FMBEMAS, Bursa Malaysia. It contains 100 companies from the Main Board with about 500 to 650 listed companies in the Main Board which comprise of multi-sectors companies across the twelvemonth 2000 to 2006 and is a capitalization-weighted index.

Bursa Malaysia is committed towards widening the Malayan capital market ‘s planetary range by offering competitory services and substructure through acceptance of internationally accepted criterions that are globally relevant.

As portion of Bursa Malaysia ‘s strategic enterprise, the Kuala Lumpur Composite Index ( KLCI ) was enhanced to guarantee that it remains robust in mensurating the national economic system with turning linkage to the planetary economic system. Bursa Malaysia together with FTSE, its index spouse, has integrated the KLCI with internationally accepted index computation methodological analysis to supply a more investable, tradable and transparently managed index.

The enhanced KLCI, whilst staying representative of the Malayan stock market, provides a platform for a wider scope of investable and appealing chances.

1.3 PROBLEM STATEMENT

This research was brought in order to detect how far macroeconomic factors such as gross domestic merchandise, rising prices, involvement rate, exchange rate and import and export may impact stock return. From old research, it is found that the macroeconomic variables play an built-in portion in act uponing the stock market. It tries to catch those variables volatility impact on investor ‘s stock market in a given economic environment and skyline.

The relationship between macroeconomic variables and stock market is, by now good documented in the literature. However, due to the altering environment of the universe economic system, past researches can non be deemed as suited for current application. There is a demand to revise the findings from the old researches to maintain consistent with current environment and economic state of affairs. This survey will establish the Malayan market as the background of research whereby Bursa Malaysia as the index of the stock market public presentation and as the background of research. The skyline of the research will cover from the beginning of 2001 to the stoping of 2010 where the universe economic system is get downing to travel into depression and based on the monthly informations.

Therefore, this is the job statement in this research:

Make macroeconomic variables have a positive or negative relationship with stock market?

1.4 OBJECTIVE OF THE STUDY

The aim of this survey is to find the relationship between macroeconomic variables and the stock market public presentation and how this information can assist investors in doing the right determinations in their investing timing.

To place the set of macroeconomic variables, which correspond more closely with the stock market.

Investigate the impact of rising prices on stock market based on monthly informations.

To look into the sensitiveness of stock market towards the macroeconomic variables.

Focus on the determiners of the stock market return from the position of macroeconomic activities.

1.5 CONTRIBUTION AND SIGNIFICANT OF THE STUDY

The survey is conducted to look at the relationship between stock market and macroeconomic variables.

For the academic field, the consequences from this survey should back up the theoretical model of the determiners of stock market motion from the position of developing economic system.

For the policy deduction, it is hoped that the findings would assist the regulative organic structures to better understand the stock market behaviour towards accomplishing the coveted pecuniary ends.

Last but non least, by cognizing which macroeconomic variables affect the stock market the most, both the personal and corporate investors should be able to proactively strategize their investings harmonizing to the alteration of the pecuniary policy.

Chapter 2

LITERATURE REVIEW

There are a batch of survey that involve look intoing the relationship of macroeconomic variables and stock monetary values in the stock market. The research workers believe that macroeconomic variables are significantly positive or negative with stock market monetary value, but some of them examine and concluded that macroeconomic variables are non related with stock monetary values.

It is adifficult undertaking to take the right macroeconomic variables that could be most valuable in following the relationship between macroeconomic variables and stock market monetary values. The current issue has been oninvestigation for a long clip ( Miller, Modigliani, 1961 ) . Harmonizing to Chen, Roll and Ross ( 1986 ) , to choose the applicable and proper macroeconomic factors require much difficult work and it would be helpful to see theoretical and empirical literature in this field of survey before set abouting such a determination ( Humpe, Macmillan, 2007 ) .

Markets respond rapidly to any intelligence, at times even any signifiers of volatility including but non limited to lifting political tensenesss or even war rumours of war, transform in regulative environment ( concern ) , deemed as negative by the concern ( puting ) community and involvement rate fluctuations in general public presentation of the economic system ( Moneybiz, 2008 ) .

Some other variables like population, motions in planetary markets, money supply growing, fabricating sector growing and aggregate sedimentations of scheduled Bankss that affect the assorted economic alterations ( Gera, 2007 ) .

Coleman and Tettey ( 2008 ) studied the impact of macroeconomic indexs on the Ghana Stock Exchange ( GSE ) and concluded that imparting rates from sedimentation money Bankss and rising prices have an inauspicious impact on stock market public presentation.

Dritsaki ( 2005 ) examine thatthe most of import thing in choosing macroeconomic variables is to protect those variablesthat would objectively reflect non merely general state of affairs in the state ‘s economic system but besides fiscal position of the state. These research workers, Fama, 1981 ; Chen, Roll, Ross, 1986 ; Cheung, Ng, 1998 ; Binswanger, 2000 ; Lakstutiene, 2008 believed that fiscal resources are closely related to economic end product of the state which is measured by industrial production.

DeFina ( 1991 ) asummed up that rising prices negatively influences companies due to quickly increasing costs. Looking for the relationship between stock market and macroeconomic variables rising prices is most frequently measured by consumer monetary value index ( Atmadja, 2005 ; Dritsaki, 2005 ; Laopodis, 2007 ) , though some scientists besides include other rising prices reflecting indices, for illustration, manufacturer monetary value index ( Teresiene, Aarma, Dubauskas, 2008 ) .

An extra, voguish macroeconomic variable is Money supply stands for another macroeconomic index that many scientists accept when they seek for the relationship between stock market monetary values and macroeconomic forces ( Urich, Wachtel, 1981 ; Chaudhuri, Smiles, 2004 ) . Tan and Baharumshah ( 1999 ) disagree that it is more expedient to analyse the narrow money M1 while others operate with loosely defined money supply M2 ( Tursoy, Gunsel, Rjoub, 2008 ) . Another group of scientists avoid this scientific treatment and enrolls both constructs of money supply in their empirical probes.

Researchers Ibrahim and Aziz ( 2003 ) , Booth and Booth ( 1997 ) , Wongbangpo and Sharma ( 2002 ) , Chen ( 2003 ) , Chen et Al. ( 2005 ) , Maysami and Koh ( 2000 ) , and Mukherjee and Naka ( 1995 ) , said that the Rate of rising prices, money supply, involvement rates, industrial production, and ex- alteration rates are the most popular important factors in explicating the stock market motion.

How money supply affects the stock market returns is besides a affair of practical cogent evidence. Harmonizing to Fama ( 1981 ) , an addition in money supply leads to an addition in price reduction rates and do the monetary value of stock lowers, therefore give a negative consequence. However, if an addition in money supply leads to economic enlargement via increased hard currency flows, so economic growing lead by such expansionary pecuniary policy will give benefit to stock monetary value and its battle by Mukherjee and Naka ( 1995 ) . In the instance of Japan, the survey shows that money supply is positively related to stock market. Maysami and Koh ( 2000 ) agreed with Mukherjee and Naka ( 1995 ) for both long tally and short tally active interaction between money supply and stock returns.

Other than involvement rateand money supply, rising prices can besides impact the motion of stock monetary values. Harmonizing to Asprem ( 1989 ) , hesaid ” rising prices should be positively related to stock return if stocks provide a hedge against rising prices ” . However, stock market has negatively consequence the rising prices and this is conclude by Barrows and Naka ( 1994 ) , Chen et Al. ( 1986 ) and Chen et Al. ( 2005 ) . When expected rising prices rate tends to lift, rising prices rate lead to warning pecuniary policies, which would hold a negative consequence upon stock monetary values.

Paul and Malik ( 2001 ) examine the being of long tally relationship among macroeconomic variables and equity monetary values in Australian finance sector. They investigate consumer monetary value index, involvement rates, and seasonally adjusted GDP and ASX Banking and Finance Index relationship utilizing autoregressive distributed slowdown ( ARDL ) theoretical account and happen that GDP growing has a important positive consequence on equity monetary values. While, involvement rate has negative consequence on the equity monetary values of Australian banking and finance sector. However, rising prices has no important consequence on equity monetary values.

Fazal and Mahmood ( 2001 ) besides study relationship between macroeconomic variables on equity monetary values but utilizing different variables such as economic activity, investing disbursement, and ingestion outgo. Using VECM and found that there is being of long tally relationship between selected macroeconomic variables and equity monetary values. Fazal ( 2006 ) investigate once more the relationship to the stochastic belongingss of the variables.

Besides that, as monetary value stableness is one of the macroeconomic policy aims by the Malayan authorities and besides an expected mark of the Malayan citizens, we believe that the relationship between rising prices and stock monetary value is undistinguished.

Study conducted by Geske and Roll ( 1983 ) , Fama ( 1990 ) , Koutoulas and Kryzanowski ( 1996 ) , and Kearney and Daly ( 1998 ) exhibit a positive relationship between industrial production and stock monetary values. On the other manus, Sadorsky ( 2003 ) fail to state a important consequence of industrial production on stock monetary values.

Harmonizing to Hashemzadeh and Taylor ( 1998 ) , investigate the way of causality between the money supply, stock monetary values, and rising prices in the US. The relationship between money supply and stock monetary values is reflected by a feedback system, with money supply explicating some of the ascertained fluctuation in stock monetary value degrees, and frailty versa.

Soenen and Johnson ( 2001 ) investigate effects of alterations in the consumer monetary value index on industrial production and stock market returns for China, and from the probe done by them, the consequence are positive and important association between stock returns and existent end product.

Previous research done by others obtained consequences demoing that short tally and long tally equilibrium relationship exists between rising prices, money supply and trading volume and the stock monetary values in the Athens stock exchange.

Muradoglu et Al. ( 2000 ) found that the relationship between stock returns and macroeconomic variables were chiefly due to the comparative size of the several stock market and their integrating with universe markets. Harmonizing to Wongbampo and Sharma ( 2002 ) , relationship was found between stock monetary values and involvement rate for the Philippines, Singapore and Thailand are negative but positive for Indonesia and Malaysia.

Chen, Roll and Ross ( 1986 ) was the first survey to choose macroeconomic variables to gauge U.S. stock returns and use the APT theoretical accounts. They employed seven macroeconomic variables, viz. : term construction, industrial production, hazard premium, rising prices, market return, ingestion and oil monetary values in the period of Jan 1953-Nov 1984. In their research, they found a strong relationship between the macroeconomic variables and the expected stock returns during the tried period.

They note that industrial production, alterations in hazard premium, turns in the output curve, step of unforeseen rising prices of alterations in expected rising prices during periods when these variables are extremely volatile, are important explicating expected returns. They found that ingestion ; the fiscal market does non monetary value oil monetary values and market index. They conclude plus monetary values react sensitively to economic intelligence, particularly to unforeseen intelligence.

On the other manus, Clare and Thomas ( 1994 ) look into the consequence of 18 macroeconomic factors on stock returns in the U.K. They found oil monetary values, retail monetary value index, bank loaning and corporate default hazard to be of import hazard factors for the U.K.

stock returns. Priestley ( 1996 ) prespecified the factors that may transport a hazard premium in the U.K. stock market. Seven macroeconomic and fiscal factors are employed ; viz. default hazard, industrial production, exchange rate, retail gross revenues, money supply unexpected rising prices, alteration in expected rising prices, footings construction of involvement rates, trade good monetary values and market portfolio. For the APT theoretical account, with the factor bring forthing from the rate of alteration attack all factors are important.

For Nipponese stock market, Hamao ( 1988 ) replicated the Chen, Roll and Ross ( 1986 ) survey in the multi-factor APT model. He put on position that the stock returns are significantly influenced by the alterations in expected rising prices and the unexpected alterations in both the hazard premium and the incline of the term construction of involvement rates. Through the APT, Brown and Otsuki ( 1990 ) explore the effects of the money supply, a production index, rough oil monetary value, exchange rates, name money rates, and a residuary market mistake on the Nipponese stock market. They observe that these factors are associated with important hazard premium in Nipponese equities.

Tan, Loh and Zainudin ( 2006 ) looked at the moral force between macroeconomic variables and the Malayan stock indices ( Kuala Lumpur Composite Index ) during the period of 1996-2005. They found that the rising prices rate, industrial production, rough oil monetary value and Treasury Bills ‘ rate have long-run relation with Malayan stock market. Result indicate that consumer monetary value index, industrial production index, rough oil monetary value and exchequer measures are significantly and negatively related to the Kuala Lumpur Composite Index in the long tally, except industrial production index coupled with a positive coefficient.

This relationship has been extensively investigated in both, theoretical and empirical literature by research workers for both developed and developing states over different sample periods and provided the conflicting groundss on this issue, see for illustration: Ramachandra ( 1986 ) , Miller ( 1991 ) , Friedman and Kuttner ( 1992 ) , Stock and Watson ( 1993 ) Boucher and Flynn ( 1997 ) , Jamie Emerson ( 2005 ) , Herwartz and Reimers ( 2006 ) Majid ( 2007 ) Saatcioglu and Korap ( 2008 ) .

A multiple arrested development theoretical account is designed to prove the relationships between the ISE-100 index returns and seven macroeconomic factors. In the arrested development theoretical accounts, the ISE-100 index returns are used as dependent variables, while the macroeconomic variables are used as independent variables.

The consequences of the paper indicate that involvement rate, industrial production index, oil monetary value, foreign exchange rate have a negative consequence on ISE-100 Index returns, while money supply positively influence ISE-100 Index returns. On the other manus, rising prices rate and gold monetary value do non look to hold any important consequence on ISE-100 Index returns.

Chapter 3

RESEARCH METHEDOLOGY

3.1 Introduction

This chapter will discourse the methodological analysis used in carry oning the survey. This survey has used secondary informations. Secondary information was obtained from DataStream and the mention to written stuff, whether from the diaries and web pages utilizing relevant information. In the analysis subdivision, the method used is of descriptive analysis to explicate the significance of each of the information. This method made usage of the application of SPSS ( Statistical Package for Social Sciences )

3.2 Data Collection

The information collected will be put in the database direction package and in this instance SPSS package used for these intents. From the system, informations is to be transferred from DataStream to the SPSS and coded to ease analysis. SPSS is besides used for descriptive analysis.

To link the independent variables and independent variables is bivariate analysis, viz. by mensurating the relevancy and the relationship between these variables.

3.3 DATA ANALYSIS

Coefficient of Variation ( CV )

A step of comparative variableness that indicates risk per unit of return. It is equal to: standard divergence divided by the average value. When used in investings, it is equal to: standard divergence of returns divided by the expected rate of return.

CV = Standard Deviation of Returns

Expected Rate of Return

Coefficient of Determination ( RA? )

Coefficient of finding or trial of goodness of tantrum will state about how good the line best tantrum. It besides step per centum of alteration in the dependant variable which will be explained by the alterations in the independent variables. The value of RA? is scope from 0.1 and it usually being valued as the higher the value of RA? , the higher is the explanatory power of the estimated equation and is more accurate for calculating intent.

T-Statistics

In order to acquire the statistics, we foremost must execute the T-test. This trial being done in order to place whether there is a important relationship between the dependant variable and each of the independent variables.

The expression for the T-Stats is as follows:

T-Stats = Value of Coefficient ( B )

Std Error of Coefficient ( Se )

Analysis of Variance ( ANOVA )

A term used to depict a statistical technique used to prove whether there is a difference between agencies of several populations. To depict the ANOVA process, see a job with K populations. For this ground, ANOVAs are utile in comparing three or more agencies. One manner that the ANOVA theoretical account can be written is

yij = Aµi + eij

where yij is the jth observation from population I

Aµi is the population means for population I

eij is a random perturbation for the jth observation from population I

F-Statistics

This is use to prove the hypothesis that the fluctuation in the independent variables explained a important part of the fluctuation in the dependant variable ( to prove the important of the overall theoretical account ) .

The expression for the F-Stats is as follows:

F-Stats = Explained fluctuation / ( k-1 )

Unexplained fluctuation / ( n-k )

Value of Coefficient

The value is used in construing the independent variables in order to see the consequence of it on the dependant variable.

3.4 CONCEPTUAL FRAMEWORK

Literature reappraisal in Chapter 2 is my effort to analyze the relationship between stock market ( KLCI ) and macro economic variables. As mentioned in the Statement of Hypothesis, three variables have been chosen to mensurate the portions monetary value. A conceptual model will be introduced to look into the relationship between these factors and KLCI. The independent variables adopted will be Inflation rate, Industrial Production and Money Supply ; meanwhile the dependant variables will be the KLCI ( portions monetary value ) , measured in footings of relationship.

Theoretical model

INDEPENDENT VARIABLES DEPENDENT VARIABLE

Inflation

Stock Market

Industrial Production

Money Supply

The undermentioned model is suggested to look into the relationship among the variables and consequence of these factors on KLCI.

3.5 STATEMENT OF HYPOTHESIS

Three variables impacting KLCI ( Kuala Lumpur Composite Index ) are chosen. The variables are Inflation Rate, Money Supply and Industrial Production.

Therefore, the hypothesis are define as below:

HYPOTHESIS 1

Holmium: There is positively important relationship between KLCI and rising prices

H1: There is negatively important relationship between KLCI and rising prices.

HYPOTHESIS 2

Holmium: There is undistinguished relationship between KLCI and the Industrial Production.

H1: There is important relationship between KLCI and the Industrial Production.

HYPOTHESIS 3

Holmium: There is undistinguished relationship between KLCI and Money Supply rate.

H1: There is important relationship between KLCI and Money Supply rate.

Chapter 4

RESEARCH RESULT

4.1 Empirical Consequence

This chapter presents the findings of the survey. The secondary informations collected and collated for the research were discussed and analyzed. Besides to discourse on the consequences from running the SPSS package from the gathered informations. These consequences are compared with the proposed hypotheses of the research and new propositions are presented harmonizing to the optimal research findings.

4.2 CORRELATION COEFFICIENT

Table 1: Correlations

LogKLCI

Inflation

LogIndProd

LogMoneySupply

LogKLCI

Pearson Correlation

1

.085

.847 ( ** )

.891 ( ** )

Sig. ( 2-tailed )

.357

.000

.000

Nitrogen

120

120

120

120

Inflation

Pearson Correlation

.085

1

.305 ( ** )

.232 ( * )

Sig. ( 2-tailed )

.357

.001

.011

Nitrogen

120

120

120

120

LogIndProd

Pearson Correlation

.847 ( ** )

.305 ( ** )

1

.832 ( ** )

Sig. ( 2-tailed )

.000

.001

.000

Nitrogen

120

120

120

120

LogMoneySupply

Pearson Correlation

.891 ( ** )

.232 ( * )

.832 ( ** )

1

Sig. ( 2-tailed )

.000

.011

.000

Nitrogen

120

120

120

120

** Correlation is important at the 0.01 degree ( 2-tailed ) .

* Correlation is important at the 0.05 degree ( 2-tailed ) .

Pearson Correlation – These Numberss measure the strength and way of the additive relationship between the two variables. The correlativity coefficient can run from -1 to +1, with -1 bespeaking a perfect negative correlativity, +1 bespeaking a perfect positive correlativity, and 0 bespeaking no correlativity at all. ( A variable correlated with it will ever hold a correlativity coefficient of 1. )

From the tabular array, it is indicated that the strength of association between the variables is really high ( r = 0.847 ) , and that the correlativity coefficient is really extremely significantly different from nothing ( P & lt ; 0.001 ) . I can state that the fluctuation in industrial production is explained by the KLCI.

In decision, the strength of association between the variables is really high ( r = 0.891 ) , and that the correlativity coefficient is really extremely significantly different from nothing ( P & lt ; 0.001 ) . Besides, it can be said that the fluctuation in money supply is explained by KLCI.

Money supply has been documented as a important for chiefly of the sectoral indices in positive manner in the stock market. This determination is congruous with theearlier surveies that pointed out positive elementalconsequence by money supply towards stock return ( Mukherjee and Naka, 1995 ; Naka, Mukherjee and Tufte, 1990 ; Ghazali and Ramlee, 2001 ; Ghazali and Soo, 2002 ; Gilchrist and Leahy, 2002 ) . Harmonizing to ( Kwon and Bacon, 1997 ; Masayami and Koh, 2000 ; Chong and Goh, 2005 ; Muradoglu, Metin and Argae, 2001 ; Ibrahim, 2001 ) , the determination of the present survey related to consequence of money supply on the positive way of stock returns concurs.

The positive relation between money supply and stock return could be observed in footings of investing penchants among the investors. The alterations in money supply contribute certain effects, peculiarly in building portfolio investing schemes among investors.

It reflects the different penchants among the investors in finding the part of investing instruments including stock in their portfolio investing. The stock monetary value will increase in response to a higher demand for stock investing and because of that, when stock monetary value addition, that will take money supply to increase.

Industrial production and stock monetary values: the industrial production and stock monetary values are positively related because the addition in industrial production cause addition in production of industrial sector, which cause addition to the net income of industries and corporations. As dividends increase ensuing portion monetary values raise ; therefore it is found positive association between IPI and portion monetary value harmonizing to economic theory.

4.3 MULTIPLE REGRESSIONS

Multiple Regressions is an extension of bivariate correlativity. The consequence of arrested development is an equation that represents the best anticipation of a dependent variable from several independent variables. Arrested development analysis is used when independent variables are correlated with one another and with the dependant variable. Besides that, multiple arrested development analysis is a method for account of phenomena and prognosis of future events. In multiple arrested development analysis, a set of forecaster variables is used to explicate variableness of the standard variable.

Table 2: Model Summary

Model

Roentgen

R Square

Adjusted R Square

Std. Mistake of the Estimate

1

.927 ( a )

.859

.855

.10064

a Forecasters: ( Constant ) , LogMoneySupply, Inflation, LogIndProd

Table 3: ANOVA ( B )

Model

Sum of Squares

df

Mean Square

F

Sig.

1

Arrested development

7.131

3

2.377

234.696

.000 ( a )

Residual

1.175

116

.010

Entire

8.306

119

a Forecasters: ( Constant ) , LogMoneySupply, Inflation, LogIndProd

B Dependent Variable: LogKLCI

Table 4: Coefficients ( a )

Model

Unstandardized Coefficients

Standardized Coefficients

T

Sig.

Bacillus

Std. Mistake

Beta

1

( Constant )

-2.552

.358

-7.135

.000

Inflation

-.026

.005

-.177

-4.821

.000

LogIndProd

.851

.135

.406

6.306

.000

LogMoneySupply

.418

.044

.594

9.431

.000

a Dependent Variable: LogKLCI

The end of additive arrested development is to happen the line that best predicts Y from X. Linear arrested development does this by happening the line that minimizes the amount of the squares of the perpendicular distances of the points from the line. Linear arrested development does non prove whether my informations are additive ( except via the tallies trial ) . It assumes that the informations are additive, and finds the incline and intercept that make a consecutive line best fit our informations.

In order to run the arrested development trial, factors related to each variable are grouped together and analyzed versus independent variable viz. Kuala Lumpur Composite Index ( KLCI ) .

Roentgen is the multiple correlativity coefficients between forecasters and public presentation. R= 0. 927, which is acceptable and favourable. R square shows how much variableness in trueness is accounted by the independent variables. R square= 0.859 shows that 85.9 % of the Kuala Lumpur Composite Index ( KLCI ) is explained by the independent variables i.e. Industrial Production, Inflation and Money Supply.

It is found that 85.9 % of entire fluctuation in the stock return ( KLCI ) can be explained by independent variables such as rising prices, Money Supply and Industrial Production. The reminder 14.10 % can non be explained by this arrested development analysis. The factor might due to other of import independent variable whichever non being considered in this survey.

This consequence shows that the relationship between stock monetary value and the independent variables has high explanatory power since it is more than 50 % .

Harmonizing to the tabular array of the coefficients of arrested development theoretical account, the sig. column shows that Sig= 0.000, there greater than 99.9 % certainty that the difference did non occur by opportunity. The cogency of the information ; the information is valid if the sig. sum is less than 0.005. Therefore, Inflation, Money Supply and Industrial variables are accepted as a forecaster.

Harmonizing to the above findings, the arrested development theoretical account can be presented as follows:

Stock Market = -2.552 – 0.26INF + 0.851IndProd + 0.418MS + Iµ

The consequence indicates high negative correlativity between Stock market and independent variables such as Inflation. The negative marks of the Inflation, proposing that an addition in stock market brings about a lessening in rising prices.

COEFFICIENT RELATIONSHIP

Table 5: Table OF REGRESSION OF COEFFICIENT

Variables

Coefficient

( B )

C

-2.552

Inflation

-0.26

MONEY SUPPLY

0.418

INDUSTRIAL PRODUCTION

0.851

Inflation

Table show that when rising prices additions by 1 % , the stocks market ( KLCI ) will diminish by 0.26. That means when the rising prices addition, the stock return will diminish. Therefore, there is negative relationship between rising prices and stock market.

MONEY SUPPLY

The tabular array shows that when money supply additions by 1 % , the stocks market ( KLCI ) will increase by 0.418. This means when the money supply addition, the stock return will increase excessively. Therefore, there is positive relationship between money supply and stock market.

INDUSTRIAL PRODUCTION

The tabular array shows that when industrial production additions by 1 % , the stocks market ( KLCI ) will increase by 0.851. This means when the industrial production additions, the stock return will besides increase. Therefore, there is positive relationship between industrial production and stock market.

T-STATISTICS

T – Statistics is used to find whether there is a important relationship between independent variables with dependent variable.

Table 6: Table OF T-STATISTCS

Variables

T-STATISTICS

Sign

T-CRITICAL

Inflation

-4.821

& gt ;

1.645

INDUSTRIAL PRODUCTION

6.306

& gt ;

1.645

MONEY SUPPLY

9.431

& gt ;

1.645

Number of observation = 120

Degree of freedom = n – K – 1

= Number of observation – figure of independent variables – 1

= 120 – 3 – 1

= 116

Since the grade of freedom is 116, the critical t-statistics from the t-distribution tabular array is 1.645

Decision regulation: –

When observe t – Statistics & gt ; critical T – Statistic, reject Ho

When observe t – Statistics & lt ; critical T – Statisticss, reject H1

Table 7: Table OF T-CRITICAL

INDEPENDENT VARIABLES

COMPUTED

T-STATISTICS

Sign

T-CRITICAL

Result

Inflation

-4.821

& gt ;

1.645

SIGNIFICANT

INDUSTRIAL PRODUCTION

6.306

& gt ;

1.645

SIGNIFICANT

MONEY SUPPLY

9.431

& gt ;

1.645

SIGNIFICANT

Inflation

Based on the tabular array above, the deliberate t-statistics for rising prices is 4.821. At 95 % confident interval degree, the deliberate t-statistics more than the t- distribution tabular array, which are 1.645. Therefore, there is important relationship between rising prices and

stock market. As a consequence, H0 will be rejected. The coefficient is said to be statistically important.

INDUSTRIAL PRODUCTION

Based on the tabular array, the deliberate t-statistics for involvement rate is 7.522. At 95 % confident interval degree, the deliberate t-statistics more than the t- distribution tabular array, which is 1.645. Therefore, there is important relationship between industrial production and stock market. As a consequence, H1 will be accepted. The coefficient is said to be statistically important.

MONEY SUPPLY

Based on the tabular array, the deliberate t-statistics for money supply is 8.860. At 95 % confident interval degree, the deliberate t-statistics more than the t- distribution tabular array, which are 1.645. Therefore, there is important relationship between money supply and stock return. As a consequence, H0 will be rejected and H1 will be accepted. The coefficient is said to be statistically important.

F-STATISTICS

Table 8: Table OF F-STATISTICS

Model

F-STATISTICS

Arrested development

234.696

The grade of freedom for numerator ( k – 1 )

= 3- 1

= 2

The grade of freedom for denominator ( n – K )

= 120- 3

= 117

From F-Distribution tabular array, the critical F-Statistics is 3.09.

Decision regulation: –

When computed F – Statistics & gt ; F-statistics value ( f-critical ) reject H0

When computed F – Statistics & lt ; F-Statistics value ( f-critical ) reject H1

Since the computed F-statistics ( 234.696 ) is more than the critical value of F-distribution tabular array ( 3.09 ) . Meaning that, the variables mensurating public presentation ; Inflation, Industrial Production and Money Supply are significantly affect the stock market. As a consequence, H0 is rejected and H1 will be accepted.

The consequences of the information analysis is consideredto support of or against the Accepted Hypothesiss: research hypotheses,

H1: There is negatively important relationship between KLCI and Inflation

H1: There is important relationship between KLCI and Industrial Production

H1: There is important relationship between KLCI and Money Supply

Chapter 5

CONCLUSION AND RECOMMENDATIONS

5.1 SUMMARY AND CONCLUSIONS

Chapter Five draws decision and nowadayss recommendations ensuing from the survey. In this chapter, the hypothesis sing the result of the information analysis will be looked upon. Furthermore, critical issues of the survey will be discussed every bit good in order to carry on farther researches. This chapter will besides sum up the survey and point out the decision from this research paper.

The findings show that market stocks have positive and negative relationship with macroeconomic variables. Changes in the rising prices rate would act upon nominal expected hard currency flows every bit good as the nominal rate of involvement. To the sum that pricing is done in existent footings, surprising price-level alterations will hold a systematic consequence, and to the extent that comparative monetary values change along with general rising prices, there can besides be a alteration in plus rating associated with alterations in the mean rising prices rate. Based on the consequences of this survey, it can clearly said that stock monetary values likely could respond negatively important to rising prices rate.

The findings besides show that there is a positive relationship between money supply and stock market, as the coefficient for the existent alteration in money supply is positive. These consequences support the existent activity theoreticians ‘ statement that an addition in money supply increases stock monetary values and frailty versa.

The findings show that industrial production has a positive important relationship with stock market. Industrial production has stronger dynamic interaction to confront the other pecuniary policy variables. The relationships of macroeconomic variables and portion monetary value motions have been studied decently in developed states.

This has no uncertainty and it is confirmed that the relationship between stock market and macroeconomic variables in Malaysia does be. However, farther surveies can be conducted to analyze the relationship between macroeconomic variables and assorted sectors in the Malaysia stock market.

5.2 LIMITATIONS OF THE STUDY

In order to execute a survey on the stock market relationship with macroeconomics variables, a more widespread and effectual study on relationships among macroeconomics variables need to be conducted. Better secondary informations could be collected from DataStream to hold a better description for decisions.

The restrictions of this survey exercising can be pointed out as follows:

The secondary informations obtained is merely for a short period of five old ages, from the Year 2001 to 2010.

For this survey to acquire is all secondary informations may non represents the existent relationships of the assorted variables recognized at this current state of affairs.

Time restraint.

Cost that occurs when making this survey exercising

5.3 Recommendation

Based on the old chapters, the argument is still really relevant on whether or non there is a relationship between market stock and macroeconomic variables. There is limited certification and research made for this issue, particularly in Malaysia. Thus the demand for farther research and probe in Malaysia on this issue is broad unfastened.

This paper provides an initial analysis on the THE EXAMINATION OF STOCK MARKET RELATIONSHIP WITH MACROECONOMIC VARIABLES EVIDENCE FROM BURSA MALAYSIA ( 2001-2010 ) . In an attempt to diminish the prejudice and mistake, the undermentioned suggestions for future research should be examined. A larger illustration size should be researched with the cardinal forces of the assorted macroeconomics variables are to be conducted for a more holistic position on the topic.