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IMPACT OF MACROECONOMICS VARIABLES TOWARD KUALA LUMPUR COMPOSITE INDEX (KLCI)
Chong Min Khiuk
Corporate Master in Business Administration
2013
Pusat Kbidm~t Maklumat Akademik UNlVERSITI MALAYSIA SARAWAJ{
IMPACT OF MACROECONOMICS VARIABLES TOWARD KUALA LUMPUR COMPOSITE INDEX (KLCI)
P.KHIDMAT MAKLUMAT AKADEMIK
1IIIIIIIIIiiITilllllllili 1000246858
CHONG MIN KHIUK
A thesis submitted
In fulfilment of the requirements for the degree of Corporate Master in Business Administration
Faculty of Economics and Business
UNIVERSITI MALAYSIA SARA W AK
2013
Statement of Originality
The work describe in this project, entitled
Impact of Macroeconomic Variables toward Kuala Lumpur Composite Index
is to the best of the author's knowledge that of the author except
where due reference is made.
June 18, 2013 Chong Min Khiuk 11031807
A BSTRAK
KesanPembolehubahMakroekonomikeatas Kuala Lumpur KompositIndeks
Oleh
Chong Min Khiuk
Kajian ini cuba dijalankan untuk menyiasat dan meni!ai kesan daripada pemboleh ubah
makroekonomi ke atas Kuala Lumpur Komposit Indeks, KLCI. Kajian ini melibatkan
beberapa pemboleh ubah yang dijangka akan memberi kesan ke atas stok market iaitu indeks . harga pengguna (CPI), penawaran wang (MS), bi! perbendaharaan Malaysia (TBR), indeks
pengeluaran perindustrian (IPI), harga emas (GP), harga minyak (OP). Data yang
diperolehi akan diuji dengan sejenis ujian yang dinamakan sebagai 'Unit root test' untuk
memastikan kepegunan data terse but. Didapati bahawa semua data adalah pegun selepas
telah melakukan ujian first d{fference '. Selepas itu, kajian diteruskan dengan ujian yang
dinamakan sebagai 'Johansen co integration test' ya,?g bertujuan untuk mengzifi hubungan
antara pasaran saham iaitu Kuala Lumpur komposit indeks dengan pemboleh ubah
makroekonomi dalam jangka masa panjang. Keputusan ujian tersebut menunjukkan bahawa
wujudnya hubungan yang kuat dan signifikan dalam jangka masa panjang antara Kuala
Lumpur komposit indeks dengan pemboleh ubah yang dipilih. Kqjian diteruskan dengan
menjalankan 'Granger causality lest ' untuk menentukan hubungan jangka pendek antara
Kuala Lumpur komposit indeks dengan pemboleh ubah makroekonomi iaitlt indeks harga
pengguna, penawaran wang, bill perbendaharaan Malaysia, indeks pengeluaran
perindusfrain, harga emas dan harga minyak. Hasil ka:jian menunjukkan bahawa wujudnya
hubungan jangka pendek di kalangan Kuala Lumpur komposit index dengan pemboleh ubah
makroekonomi iaitu penawaran. Selepas menjalankan ketiga-tiga ujian tersebut, kesimpulan
menunjukkan bahawa pemboleh ubah yang digunakan dalam kajian ini sememangnya
mempunyai kesan ke atas pasaran saham di Malaysia. Kajian ini amat penting bagi peserta
pasaran saham dan terutamanya pembuat dasar untuk memahami fingkah laku stok market
serta membuat keputusan yang tepat apabi/a melakukan pelaburan. Selain daripada itu,
melalui kajian ini juga membolehkan peserta pasaran saham memainkan peranan mereka
dalam menilai trend pasaran saham.
Kata kunci: Indeks Harga Pengguna, Penawaran Wang, Indeks Pengeluaran Perindustrian,
Bil Perbendaharaan Ma~ysia, harga Emas, Harga Minyak, Kuala Lumpur komposit indeks
.'
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ABSTRACT
Impact of Macroeconomic Variables toward Kuala Lumpur Composite Index
By
Chong Min Khiuk
This paper is attempted to investigate and evaluate the impact of macroeconomic variables
toward Kuala Lumpur Composite Index, KL<;I. There are several variables that included in
this study, namely consumer price index (CPI), money supply (MS), Malaysian Treasury bill
(TBR), industrial production index (lPI), gold price (GP), oil price (OP). The data that
obtained will tested by the Unit root test in order to ensure the stationary of the data All of
the series data are significance after first difference was made, following by the Johansen co
integration test to examine the long run relationship of the variables. It proved that, there
.. exist long run and strong significance relationship be~ween Kuala Lumpur Composite Index
and the selected variables. The study proceeds to Granger causality test revealed that there
exist short run relationship between the Kuala Lumpur Composite Index and the variables
namely consumer price index, money supply, Malaysia Treasury bill, industrial production
index, gold price and oil price. After implemented these three tests, the result showed that the
selected variables do have impact on the stock market in Malaysia. This study is important
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r
for those market participants and especially policy maker to understand behavior of the stock
market as well in order to make right decision when doing their investment portfolio.
Keywords: Consumer Price Index, Money Supply, Industrial Production Index, Malaysian
Treasury Bill, Gold Price, Oil Price, Kuala Lumpur Composite Index .
.'
IV
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ACKNOWLEGMENT
In order to complete this study, I would like to express my sincere appreciation to my
supervisor, Dr DayangAffizahAwangMarikan for her guidance and support in the whole
process of this study. Even though Dr Dayang was busy, she willing to spend her time with
me and discuss the study. The expertise and knowledge of my supervisor has benefited me to
complete this study on time. Dr Dayang has made me realize the meaningful of the research
and the effort that put.
Apart from that, I would like to convey my appreciation to my course mates, they
provided me masses valuable idea and suggestion when I am doubt. Moreover, I would like
to take this opportunity to express my gratitude to my family members. The supports, caring,
patience given by them had strengthened me !o complete this study successfully. Without
them, it would very hard for me to complete this thesis as well.
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Pusat Khidmat Maklumat Akademik UNlVERSm MALAYSIA SARAWAK
TABLE OF CONTENTS
Abstrak
Abstract
Acknow ledgment
III
v
CHAPTER 1: INTRODUCTION
1.1 Overview
1.2 Background of Study
1.3 Problem Statement
1.4 Objective of the Study
1.4.1 General Objective
1.4.2 Specific Objective
1.5 Significance OfThe Study
1.6 Scope OfThe Study
1
2
7
10
10
12
CHAPTER 2: LITERATURE REVIEW
2.1 Overview
2.2 Review iit Developing and Developed Couptries
2.3 Summary
13
17
20
...------------------------------------~
T ABLE OF CONTENTS
Ahstrak
Abstract
Acknowledgment
111
v
CHAPTER 1: INTRODUCTION
1.1 Overview
1.2 Background of Study
1.3 Problem Statement
1.4 Objective of the Study
1.4.1 General Objective
1.4.2 Specific Objective
1.5 Significance Of The Study
1.6 Scope Of The Study
2
7
10
10
12
CHAPTER 2: LITERATURE REVIEW
2.1 Overview .,
2.2 Review in Developing and Developed CouI}tries
2.3 Summary
13
17
20
CHAPTER 3: METHODOLOGY
213.1 Overview
223.2 Data Analysis Methods
293.3 Data Description
373.4 Theoretical Framework
3.5 Empirical Model 38
403.6 Hypotheses
413.7 Summary
CHAPTER 4: RESULTS AND DISCUSSION
424.1 Introduction
424.2 Unit Root Test
4.3 Co integration Test 45
4.4 Granger Causality Test 52
554.5 Conclusion
CHAPTER 5: DISCUSSION, CONCLUSION AND IMPLICATIONS
.. 565.1 Introduction
5.2 Overview of the Study 56
5.3 Discussion and Implications 57
5.4 Policy Implications 61
625.5 Limitation and Recommendation
5.6 CONCLUSION 63
REFERENCES 64
APPENDIX 75
LIST OF TABLES
TABLE 4.2.1 UNIT ROOT TEST 43
TABLE 4.3.1 JOHANSEN TEST FOR MULTIPLE CO INTEGRATION 45
VECTORS
TABLE 4.3.2 VECTOR ERROR CORRECTION MODEL 47
TABLE 4.4.1 GRANGER CAUSALITY TEST 52
TABLE 4.4.2 CAUSALITY RELATIONSH1P DIRECTION 54
LIST OF DIAGRAM
DIAGRAM 3.4.1 RELATIONSHIP BETWEEN MACROECONOMIC 39
VARIABLES AND MALAYSIAN STOCK MARKET
I
LIST OF ABBREVIATIONS
._--\Abbrev---iations--------------------------rDesc~iptio"i1 -.
CPI ----·------------·----------t-consumer Price Index i I1---- - -.--.-..--..- ----.-.......-.-..-...--....-...-..-.+-...-.----..-.---..- .......--...--....-.....-...-...--.-.-...--..--..-
GOP l' Gross Domestic Product >------_._.-_._._... _._....... __ .. _-_..-......._..-..._.._._..._.__._.. _ .._._..._.._.._..._--_..._..._.._.-.-_.._._ _..--_.._---._--_..._ _ ......
IPI ________... _.. _._____ .. _.. _._ .. _.. _._....._____... I_~:.~~::_i:~ _pr:~~c_~on Inde~__._.. ____l
MS 1Money Supply
1--_________.. _._.___._......_._... _......._... _..._._...-...-..-...- ..-...-..1.--.-..---..--...-...---... .---....-.- ----..-..---..-.--.-.--TBR I Treasury Bill
I------- -- --- --- ----1------·--------------- · --- ---------- -------
::=:====~-.-~~=:=_.~j~:__ _______-_____:1:~=_--~-~=:~_KLCI I Kuala Lumpur Composite Index
Ifo---------- ---------- -. -- - -- --- - t- --- ---- . -- -- ------- - -.------- ------ ---
KLSE ___________________ ___ ______L~~~a Lumpur ~_~~ck~:~ha~~_____
CHAPTER 1
INTRODUCTION
1.1 Overview
Economic growth and efficiency of economics have been the major goals of every
nation. To be able to maintain stable and high standard of living, policy makers and
economists are constantly searching for alternatives to assure healthy growth. When security
prices reflect all information about the market, thus it is achieving an efficient market. An
efficient capital market also promotes aggregate growing through maintaining and alleviating
the financial sector and provides them with an important investment strait. Which this will
attract domestic and foreign capital. In order to predict the movement of stock prices,
investors should be able to obtain current information of the market. However, history shows
that economic growth was never sustained in the long term. Economic instability occurred
from time to time like a storm once in a while. Economists classified this situation as the
business cycle due to the out-of-action and rumbles in economic activities.
The movement of stock market price is an important indicator to enhance the stability
of economic performance of any nation. A well-organized stock market plays a crucial role in
industry and commercial growth of the country. Positive growth of stock market simply
depicts a country with progressive development and vice versa. The prices of stock market are
detennined by demand and supply of company stocks while stock market acts to improve and
conditions economic efficiency and financial system of a country. Foreign portfolio
investment and liquidity of stocks influence stock market performance and further affects
economic performance.
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The most recent stock market performance took a huge impact during the economy
crisis back in 2008. Evidently, the downturn was attributed to the influence of sensitivity of
macroeconomic variables in Malaysia towards stock markets.
This study analyses the causality and relationship between stock market price and
macroeconomic variables namely consumer price index, money supply, Treasury bill,
industrial production index, gold price, oil price by using the unit root test and Johansen' s co
integration test to determine the stationary pattern of the test data with autoregressive model.
Malaysia stock prices is none other than the dependent variable while the consumer price
index, industrial protection index, gold price, money supply, Treasury bill, gold price and oil
price are categorised as independent variables.
1.2 Background of the Study
Stock market stability is a good instrument for investor to guarantee their profitability
and generate their wealth. But, stability stock market not always exists in the nowadays
Malaysian stock market. There are several issues in the stock market recently, namely the
subprime mortgage crisis; it started from 2007 until 2008, oil crisis from 1971 until 1973,
Commodity crisis, which start from 1980-1981, following by Financial crisis on 1997 until
1998. (Okposin & Cheng, 2000).
The first oil crisis in 1971 until 1973 in the world has slowdown the industrialised
countries and affected the export. A decline of stock prices is due to the rising in oil prices
and it shows any fluctuation in oil price may cause the stock return to fluctuate. (Bina & Vo
2007). Moreover, stock return may impacted from changes of the oil price. The inverse
reaction of stock prices toward oil price only found when there are rises in oil price which is
due to an increase in avoiding demand driven of crude oil. Higher oil prices will lead to 2
economic expansion and it will cause to positive effect on stock market returns. Kilian & Park
(2007). This increasing of the oil price eventually leads to increases of price goods, which this
will bear a burden to customers that finally will be experiencing inflation. As there is inflation
in the country, many sectors will be impacted such as companies and consumers. In order to
solve this issue government introduced a series of monetary measures to increase the deposit
and lending rates with purpose to reduce the burden of the company and reduce the
unemployment in order to promote economic stability in the country.
During the commodity crisis of the early 1980, it caused slowdown in the Malaysian
economy due to the rapid drop in commodity prices and increases in the domestic and
external debt this consequently had created financial imbalances with the gradual rise in the
interest rates. In 1985, Malaysian had facing the electronic crisis that caused by the huge
dropped in electronic price and this affected the Malaysian GOP.
Following by the recent economic crisis in 1997, which caused by financial crisis, had
severely impacted on stock market, exchange rates, banking sectors in Malaysian. This crisis
is due to the immediate withdrawal of short tenn capital flows from the country at the same
time the floating of Thai's baht in July 1997. The impact of the downturn leads to rises in the
inflation rate and high unemployment level in 1998, not only that, sales and profits of any
companies are expected to decrease. One of the. major public policies would be the
government would reduce interest rate and encourage spending to stimulate the economy.
According to Roubini (2006), months before the start of the recession, a sharp falling the
share prices can be observed, leading to poor financial market perfonnance. The perfonnance
ofthe stock market during recessionary periods is clearly reflected. During the financial crisis
1997-1998, the Kuala Lumpur Composite Index (KLCI) of Malaysia showed a down trend
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from January 1997 and reached its trough in September 1998, moreover the Malaysian
currency kept depreciating and reached to 4.545 in January 1998.
Apart from that, industrial production index was also declining due to the fallen of
production in electricity, electronic, and manufacturing. In term of inflation rate, it had
increasing from 92.68 in the year 1997 to 97.59 in the year 1998. However, in 1999 the real
GDP has grown up to 5.6 per cent due to the expansionary monetary policies. But before the
financial crisis happened, the performance of KLCI's point has reached more than 1200
points.
On the other hand, the recent subprime mortgage crisis that started in year 2007,
where housing loans were given to individual with poor credit history, this eventually lead to
the failure of collecting back the loans. As interest rate begins to rise, housing price follows
suit in the opposite direction by taking dips. Consequently this leads to the bankruptcy of
several major players in the banking sector as such the Lehman Brothers, a 158-year-old
investment bank, declared bankruptcy on 15 September 2008. All these negative news have
chain reaction toward the other sectors like manufacturing, housing and mortgage,
commodities. Major indices in United States like Dow Jones, S&P500, and NASDAQ are
mostly bearish and have been decreased tremendously since then. Earnings prospect are
clouded by macro-economic concerns.
Other than the financial crisis, the stock market is affected by many other factors as
well. For example, the interest rate, gross domestic product, exchange rate, money supply,
inflation, fiscal policy and so on. It is not very practical to include all possible
macroeconomic variables to determine the performance of the stock market since many of
these variables are closely correlated giving rise to estimation problems. For this study, we are
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Pusat Khidmat Maklumat Akademik. UNIVERSm MALAYSIA SARAWAK
keen to find out the relationship between the Treasury bill , money supply, industrial
production index, oil price, gold price, consumer price index and the stock market index
(Kuala Lumpur Composite Index, KLCI) .
The priority expected relationship between stock market and interest rate is that they
are negatively correlated. When the interest rate is low, the stock market index will increase
and vice versa. This is due to investors shifting their money from their savings or fixed
deposits to the stock market in order to gain a higher return. Another investment instrument
which compete with investment in the stock market.
In the recent economic crisis, a recession is expected to follow by the crisis. In order
to stimulate the economy, government has lowered the interest rate. Overnight policy rate is
fixed at 2.00 and as of 29th May 2009, interest rate is 0.0 % - 1.0% for savings and current
account and 2.0 - 2.5% for fixed deposits (Public Bank). When the interest rate is iow,
investors are expected to shift their money to a higher risk instruments in order to gain higher
return. Malaysia practised a low interest rate regime due to the need to generate economic
srowth with price stability. Furthermore, inflation has not been deemed a serious issue since
the early eighties. Tn fact, many daily consumer products especially daily necessities including
but not limited to petrol, sugar, rice and etcetera are under a price control system. The graph
ow showed the Malaysia stock market movement from year 1994 till year 2012.
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FTSE Bursa Malavsia KLCI 6 '
1800 1~ ~~~J____________________________________________~______
1400 ;.-----------------------------------------~,-----~~_4---
1200 t------~-~~--------------------------~~--~~~--------
1~ ~~~F\~~--.l_------~----------~----~~--~_4:----------
800
400
200 ~I---------------------------------------------------------
oL
Chart 1: FTSE Bursa Malaysia KLCI (KLSE) prices from 1994 to 2012.
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.3 Problem Statement
Understanding the relationship between Malaysia stock market price and the
macroeconomic variables helps national as well as international investors to hedge and
diversify their portfolio. Ravazzolo and Phylaktis (2005) indicated that fundamentalist
investors have taken into account these relationships to predict future trends.
During the Asian financial crisis in the past few years, the fluctuating share prices of
stock market resulted in economic instability. (Tham Siew Yean, 2004). Kurihara (2006)
explained that the fluctuation and instability are due to multiple factors such as current
accounts, dividends, enterprise performance, exchange rates, gross domestic product, money
supply, interest rates and foreign countries stock price. These factors directly and indirectly
impact on the stock market and cause fluctuation of stock price periodically. Apart from that,
there are drastic dropped in the private investment due to the inefficiencies of country's new
policy namely AFC, a fiscal deficit policy which leads to higher corruption that faced by
investors and public. Malaysia was stuck in the phenomena of losing its competitive edge as a
low cost producer. Moreover, Malaysia is facing unhealthy public revenue structure which is
lower and narrow in tax rate, whereas higher in government revenue up to 40 per cent. This
higher revenue is derived from the oil and gas earnings, yet Malaysia is expecting will
running insufficient of these resources and expected will not sustainable in the long term.
(World Bank, 2009)
During the 2008 global financial crisis also, the gold price has been escalating at an
1IIlJRCedented level. This have given the investor calm enough to keep gold in their portfolio,
whereas for investors who suffered heavily loss from the stock price falling did think invest
OD tb gold. However, gold price is not always shows adverse movement with the stock price 7
Malaysian
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:__
over the time, the gold price may boom or crash during the crisis. Therefore, it is important in
vestigating the study regarding on these issues.
In addition, Ang and Ma (2001) pointed out that financial analysts failed to anticipate
the flaws of their corporate subjects which further led to the failure to make sufficient
adjustments of original forecasts after the market crash. However, no panic or herding on
large scale was evident. The stubbornness of the analysts to improvise and recover from other
market and macroeconomic events was attributed to the already wavering forecasts which had
ultimately showed that the analysts were totally out of place during the crisis.
On the other hand, the post-crisis era saw improvements due to upturn in global
economy and reinforced the importance of the integration of Malaysia with global economy
and the bounded implications as explained by Abidin and Rasiah (2009). The injection of
fi$C8l stimulus and accelerated development expenditure were part of the response from
government to have successfully overturned the economic contraction.
Government injections will affect the labour incentive, government capital fonnation and
agregate demand. Lastly it will effect on financial perfonnance of Malaysian stock market.
However, in the November 2007, stock market index was achieving almost RM
1 96.98 at the highest level and it experienced the lowest level in 2001 and 2008 which is RM .
512.88 and RM 863.61 respectively. This huge reduction from the highest level is caused by
mic downturn in U SA which also affecting Malaysian stock market index. According to
Babammshah et aI., (2002), there are closer relationship between financial market and
alluti'on of economic. In fact, anything that happened to the financial market will affect the
"00 in economic activities. (Ibrahim & Wan Yusoff, 2002).
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Although previous findings found many factors influencing the fluctuation of stock
ct, much of the research have showed inconsistent results across countries and time. In
eral, different studies provide different results. Therefore, it will be essential to have a
~ra_rch to investigate the real situation in Malaysian stock market by using different
"cators namely consumer price index, money supply, Malaysian treasury biU, industrial
QODUI1odity indicates that might contribute to the stock market changes. Such information will
crucial especially to market participants enabling them to make a better decision for their
investment.
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