Modeling the relationship between KLCI and monetary policy after the 1997 Asian financial crisis

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

Using Johansen multivariate cointegration test with structural break and Granger-causality based on vector error correction model, the interactions between stock prices (KLCI) and monetary policy variables (M1, M2 and interest rate) are examined in the Malaysian setting using monthly data for the post 1997 Asian financial crisis period from January 2000 to May 2008. Four major conclusions can be drawn from the results. First, evidence of significant cointegration relationships prevails only when structural break is considered in the models. Second, among the monetary variables, only interest rate (money market rate, MM) has a direct short-run relationship with stock prices whereas the relationships between monetary aggregates and stock prices are indirect through MM. Third, all three monetary variables consistently show long-run impacts on stock prices. Fourth, between the two monetary aggregates, M2 consistently prevails as an effective monetary policy tool whereas M1 fails to assume such function. The policy implication of this study is that Bank Negara Malaysia can rely on interest rate rather than money supply as short-term measure to manage the stock market more effectively. However, in the long-run, both interest rate and money supply (specifically M2) can be relied upon to monitor the stock market condition. Investors in the meantime may interpret results of this study as supporting evidence that the stock market in Malaysia is still inefficient. Accordingly, they should exploit new information triggered by changes in monetary policy stance to formulate their future investment strategy.

Original languageEnglish
Pages (from-to)37-48
Number of pages12
JournalJurnal Pengurusan
Volume30
Publication statusPublished - Jul 2010

Fingerprint

Interest rates
Modeling
Monetary policy
Stock prices
Asian financial crisis
Stock market
Money supply
Structural breaks
Monetary aggregates
Malaysia
Money market
Cointegration
Policy implications
Policy tools
Cointegration test
Investors
Interaction
Investment strategy
Price policy
Vector error correction model

ASJC Scopus subject areas

  • Business, Management and Accounting (miscellaneous)
  • Accounting
  • Business and International Management

Cite this

Modeling the relationship between KLCI and monetary policy after the 1997 Asian financial crisis. / Md Nor, Abu Hassan Shaari; Abdul Rahim, Ruzita; Mohd, Hamizah; Isa, Zaidi; Ergun, Ugur.

In: Jurnal Pengurusan, Vol. 30, 07.2010, p. 37-48.

Research output: Contribution to journalArticle

@article{3f8b02813b8e4ffca6a48ae535ab6131,
title = "Modeling the relationship between KLCI and monetary policy after the 1997 Asian financial crisis",
abstract = "Using Johansen multivariate cointegration test with structural break and Granger-causality based on vector error correction model, the interactions between stock prices (KLCI) and monetary policy variables (M1, M2 and interest rate) are examined in the Malaysian setting using monthly data for the post 1997 Asian financial crisis period from January 2000 to May 2008. Four major conclusions can be drawn from the results. First, evidence of significant cointegration relationships prevails only when structural break is considered in the models. Second, among the monetary variables, only interest rate (money market rate, MM) has a direct short-run relationship with stock prices whereas the relationships between monetary aggregates and stock prices are indirect through MM. Third, all three monetary variables consistently show long-run impacts on stock prices. Fourth, between the two monetary aggregates, M2 consistently prevails as an effective monetary policy tool whereas M1 fails to assume such function. The policy implication of this study is that Bank Negara Malaysia can rely on interest rate rather than money supply as short-term measure to manage the stock market more effectively. However, in the long-run, both interest rate and money supply (specifically M2) can be relied upon to monitor the stock market condition. Investors in the meantime may interpret results of this study as supporting evidence that the stock market in Malaysia is still inefficient. Accordingly, they should exploit new information triggered by changes in monetary policy stance to formulate their future investment strategy.",
author = "{Md Nor}, {Abu Hassan Shaari} and {Abdul Rahim}, Ruzita and Hamizah Mohd and Zaidi Isa and Ugur Ergun",
year = "2010",
month = "7",
language = "English",
volume = "30",
pages = "37--48",
journal = "Jurnal Pengurusan",
issn = "0127-2713",
publisher = "Penerbit Universiti Kebangsaan Malaysia",

}

TY - JOUR

T1 - Modeling the relationship between KLCI and monetary policy after the 1997 Asian financial crisis

AU - Md Nor, Abu Hassan Shaari

AU - Abdul Rahim, Ruzita

AU - Mohd, Hamizah

AU - Isa, Zaidi

AU - Ergun, Ugur

PY - 2010/7

Y1 - 2010/7

N2 - Using Johansen multivariate cointegration test with structural break and Granger-causality based on vector error correction model, the interactions between stock prices (KLCI) and monetary policy variables (M1, M2 and interest rate) are examined in the Malaysian setting using monthly data for the post 1997 Asian financial crisis period from January 2000 to May 2008. Four major conclusions can be drawn from the results. First, evidence of significant cointegration relationships prevails only when structural break is considered in the models. Second, among the monetary variables, only interest rate (money market rate, MM) has a direct short-run relationship with stock prices whereas the relationships between monetary aggregates and stock prices are indirect through MM. Third, all three monetary variables consistently show long-run impacts on stock prices. Fourth, between the two monetary aggregates, M2 consistently prevails as an effective monetary policy tool whereas M1 fails to assume such function. The policy implication of this study is that Bank Negara Malaysia can rely on interest rate rather than money supply as short-term measure to manage the stock market more effectively. However, in the long-run, both interest rate and money supply (specifically M2) can be relied upon to monitor the stock market condition. Investors in the meantime may interpret results of this study as supporting evidence that the stock market in Malaysia is still inefficient. Accordingly, they should exploit new information triggered by changes in monetary policy stance to formulate their future investment strategy.

AB - Using Johansen multivariate cointegration test with structural break and Granger-causality based on vector error correction model, the interactions between stock prices (KLCI) and monetary policy variables (M1, M2 and interest rate) are examined in the Malaysian setting using monthly data for the post 1997 Asian financial crisis period from January 2000 to May 2008. Four major conclusions can be drawn from the results. First, evidence of significant cointegration relationships prevails only when structural break is considered in the models. Second, among the monetary variables, only interest rate (money market rate, MM) has a direct short-run relationship with stock prices whereas the relationships between monetary aggregates and stock prices are indirect through MM. Third, all three monetary variables consistently show long-run impacts on stock prices. Fourth, between the two monetary aggregates, M2 consistently prevails as an effective monetary policy tool whereas M1 fails to assume such function. The policy implication of this study is that Bank Negara Malaysia can rely on interest rate rather than money supply as short-term measure to manage the stock market more effectively. However, in the long-run, both interest rate and money supply (specifically M2) can be relied upon to monitor the stock market condition. Investors in the meantime may interpret results of this study as supporting evidence that the stock market in Malaysia is still inefficient. Accordingly, they should exploit new information triggered by changes in monetary policy stance to formulate their future investment strategy.

UR - http://www.scopus.com/inward/record.url?scp=78049300633&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=78049300633&partnerID=8YFLogxK

M3 - Article

VL - 30

SP - 37

EP - 48

JO - Jurnal Pengurusan

JF - Jurnal Pengurusan

SN - 0127-2713

ER -