Oil price shocks and stock returns nexus for Malaysia: Fresh evidence from nonlinear ARDL test

In this research, we examined whether appreciation and depreciation in oil price, interest rate, exchange rate, industrial production, and inflation have the same effects on the stock market returns by using nonlinear autoregressive distributed lag (nonlinear ARDL). All nine economic sectors and aggregate stock market are considered in this study. Moreover, monthly data is utilized from January 1990 to November 2016 and from May 2000 to November 2016 for the aggregate market and the nine sectors, respectively. The bound test results showed strong evidence that all sectors (excluding plantation sector) including the aggregate market are cointegrated. Furthermore, the findings of this study implied that oil price shocks have an adverse impact on the stock market returns in most cases regardless whether oil price shocks are in an appreciation or depreciation direction. This shows that the Malaysian market is inefficient and very sensitive to the oil price fluctuations. In addition, the findings showed there is a long run asymmetric link between oil price shocks, interest rate, exchange rate, industrial production, inflation and stock market returns at both aggregate and sectors level in most cases. Keywords: Stock market returns, Oil price shocks, Nonlinear ARD