Modeling the interactions of stock price and exchange rate in Malaysia

Mohd Tahir Ismail, Zaidi Isa

Research output: Contribution to journalArticle

10 Citations (Scopus)

Abstract

After the East Asian crisis in 1997, the issue of whether stock prices and exchange rates are related or not have received much attention. This is due to realization that during the crisis the countries affected saw turmoil in both their currencies and stock markets. This paper studies the non-linear interactions between stock price and exchange rate in Malaysia using a two regimes multivariate Markov switching vector autoregression (MS-VAR) model with regime shifts in both the mean and the variance. In the study, the Kuala Lumpur Composite Index (KLCI) and the exchange rates of Malaysia ringgit against four other countries namely the Singapore dollar, the Japanese yen, the British pound sterling and the Australian dollar between 1990 and 2005 are used. The empirical results show that all the series are not cointegrated but the MS-VAR model with two regimes manage to detect common regime shifts behavior in all the series. The estimated MS-VAR model reveals that as the stock price index falls the exchange rates depreciate and when the stock price index gains the exchange rates appreciate. In addition, the MS-VAR model fitted the data better than the linear vector autoregressive model (VAR).

Original languageEnglish
Pages (from-to)605-619
Number of pages15
JournalSingapore Economic Review
Volume54
Issue number4
DOIs
Publication statusPublished - 2009

Fingerprint

Exchange rates
Modeling
Malaysia
Interaction
Stock prices
Stock exchange
Vector autoregression model
Markov switching
Regime shift
Price index
Composite index
Singapore
Currency market
Empirical results
Stock market
Vector autoregressive model
East Asian crisis

Keywords

  • Exchange rates
  • Markov switching vector autoregression model
  • Stock price

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this

Modeling the interactions of stock price and exchange rate in Malaysia. / Ismail, Mohd Tahir; Isa, Zaidi.

In: Singapore Economic Review, Vol. 54, No. 4, 2009, p. 605-619.

Research output: Contribution to journalArticle

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