Macroeconomic variables and stock markets (domestic and foreign): evidence from Malaysia

The growing literature on the relationship between Malaysia’s macroeconomic variables and its relation to the performance of Kuala Lumpur Composite Index (KLCI) is well documented. The aim of this term paper is to extend the existing literature by using selected macroeconomic variables and also, include the external variables i.e. the performance of other stock markets around the world namely, United Kingdom’s Financial Times Index, United States Dow Jones Index, Singapore Straits Times Index, and Japan Nikkei Index into the equation. Thus, this paper will provide an analysis on the cointegration relationships among these variables (internal and external) in the long-run by using the standard time series techniques. The result indicates that stock exchanges are a cointegrated market and that there is a long run theoretical relationship among all the selected variables. The variance decomposition analysis tends to reveal that the Malaysian stock market is driven mostly by the exchange rate followed by the stock markets of Singapore and Japan.The results have strong policy implications