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The Relationship between Macroeconomic Variables and Stock Market Capitalization in Malaysia.

Introduction

The stock market plays a crucial role to ensure economy stability and act as mediator between lenders and borrowers. Financial markets have contributed enormous amount of development during these two decades. Various macroeconomic variables affect stock market behaviour in line with intuitive financial theory (Maysami and Koh, 2000). Ting et al., 2012 established that Kuala Lumpur Composite Index is consistent influenced by interest rate, money supply and consumer price index in the short run and long run in Malaysia.

Recently, stock market has become central issue in Malaysia's stock market. Thus, it is difficult to take for granted the importance of the stock market return, which will represents a country's economy activities (Ting et al., 2012). Hence, the significant relationship between stock price and macroeconomic variables are highly important and attracted concern of economists, policy makers and the investment community for a long time (Kutty, 2010).

There has being no research in an attempt to explain the current performance of stock markets in emerging economies regarding macroeconomic variables. This study is arguing about macroeconomic instability negatively impacts stock market development.

The general purpose of this research is to explore the relationship between macroeconomic variables and stock market in the context of Malaysia economies.

1. To study the impacts of macroeconomic variables (inflation and exchange rate in dollar) and GDP on stock market in Malaysia.

2. To investigate the relationship between macroeconomic variables and stock market capitalization in Malaysia.

Since the research was, develop for better understanding on macroeconomic variables impacts on stock market. Hence, the research question of this study are;

1. What is the impact of macroeconomic variables on stock market in Malaysia?

2. What is the relationship between macroeconomic variables and stock market capitalization?

Literature Review

Osei (2006) found that there is a relationship between Ghana stock market and macroeconomic variables in short run and long run. Gay (2016) found that inflation and interest rate have significantly relationship stock market. They found that a significantly relationship between macroeconomics and market stock. According to Eita (2012), employing the panel data methodology, he examines the macroeconomics variables such as inflation and exchange rate in Namibia. The empirical test reveals how stock prices decreases when exchange rate and inflation increases.

Levine (1996) studied the impact of stock market to GDP. He found that stock market is strongly impact to economic growth. Haque (2011) found that stock market not influenced by GDP in Bangladesh. The main reasons identified that fund mobilised by stock market in Bangladesh is still in transitional period and it is very small in relation to its economy. Poornima (2016), Yusuf (2012), Rabia (2015) claimed that exchange rate have significant relationship with stock market capital. Beirne et al. (2009) found that interest rate significantly positive relationship on stock market capitalization rate.

Method

The objective of this study is to investigate the relationship between macroeconomics variables with stock market capitalization. The sample size in this study covers for a period from 2005 to 2015 on an annual basis. The data collected from Bank Negara and Bursa Malaysia.

This research study is tested the relationship between macroeconomics variables with stock market capitalization, thus, multiple regression model applied. The multiple regression equations can be represent as follows: The formula that will be use is:

Y=a +B1 X1 +B2 X2 + B3 X3 + e (1)

Whereby;

Y = Capital market capitalization

a = constant

X = independent

e = error

Hypothesis 1

Ho1: There is no significant impact between inflation rate and stock market capitalization in Malaysia.

Ha1: There is a significant impact between inflation rate and stock market capitalization in Malaysia.

Ho2: There is no significant impact between exchange rate and stock market capitalization in Malaysia.

Ha2: There is a significant impact between exchange rate and stock market capitalization in Malaysia.

Ho3: There is no significant impact between GDP and stock market capitalization in Malaysia.

Ha3: There is a significant impact between GDP and stock market capitalization in Malaysia.

Hypothesis 2

Ho1: There is no significant relationship between inflation rate and the stock market capitalization.

Ha1: There is a significant relationship between inflation rate and the stock market capitalization.

Ho2: There is no significant relationship between exchange rate and the stock market capitalization

Ha2: There is a significant relationship between exchange rate and the stock market capitalization.

Ho3: There is no significant relationship between GDP and the stock market capitalization.

Ha3: There is a significant relationship between GDP and the stock market capitalization.

Findings

According to the correlation result, inflation rate and stock market have a positively correlated relationship with a magnitude 14.2%, accepted at the 1% level of significant. GDP and stock market have a positively correlated relationship with a magnitude 24.3%, accepted at the 1% level of significant. Exchange rate and stock market have a negatively correlated relationship with a magnitude 47%, accepted at the 1% level of significant. This result supported by Gay (2012) and Poornima (2016), Therefore, Ha1 accepted to GDP because there is a significant factor that influences capital stock market with independent variable, which is GDP. Ha2 accepted to inflation rate because there is a significant factor that influences capital stock market with independent variable, which is inflation rate. Ha3 accepted to exchange rate because there is a significant factor that influences capital stock market with exchange rate.

Regression equation expresses the linear relationship between two or more variables. Table 2 show the estimated R square is 0.692, indicating that 69.2 % changes in capital stock (dependent) is due to changing in independent variable are reliable. Since p value =0.0158 < 0.05, it was found there are have significant in between macroeconomics variables with stock market capitalization.

The regression model is

SMC = 961.081 + (0.00) GDP + (-7.589)CPI + (-75.744)EXCHG + [epsilon] (2)

Based on the above equation, it expressed the significant relationship inflation, GDP and exchange rate and stock market capitalization. It indicates the coefficient of the independent variables and dependent variables.

So, the constant value of this coefficient is 961.081 which is will remain the same if the independent variables changing to another number. Meanwhile, if one unit of gross domestic product is increases, then there will be no changes in stock market capitalization while other variables are remaining constant. Next, if one unit of stock market is increase, there will be - 7.589 decreases in inflation rate while other variables are remaining constant. Lastly, if one unit of stock market is increase, thus there will be -75.744 decrease in exchange rate while other variables are remaining constant.

Based on the probability value, inflation rate has a significant factor that influence stock market because the probability value is less than the significant value of 10%. The probability value of inflation rate respectively is 0.096, which is lower than 10%. Furthermore, it indicates that there is a negative impact between inflation rates towards stock market. This result supported by Eita (2012). Therefore, Ha1 is accept for inflation rate because there is significant factor that influence stock market with independent variable, which is inflation rate.

It also same with the other independent variable which is exchange rate because the probability value of these variable are 0.086 which is lower than 10%. However, it still shows that there have a negative impact exchange rate toward stock market. Ha2 is accept for exchange rate because there is significant factor that influence stock market with independent variable, which is exchange rate. For GDP, the probability value is more than a significant value of 10%. It indicates that the GDP do not significant and have a zero impact toward stock market. Ho3 is accept for GDP because there is significant factor that influence stock market with independent variable, which is GDP.

Discussion and Conclusion

Hence, the conclusion of this study is explaining that the macroeconomic variables have significant relationship with the stock market capitalization. More than that, the regression model is significant which explain how the regression of the exchange rate and inflation rate give impact towards stock market capitalization.

Lastly, this study conclude that macroeconomic variables is a vital tool for investigating the impact of it to the stock market capitalization. So, further study is needed to investigate the others macroeconomic variables available and collecting data for a long-run method. This is because this study is investigating the short-run impact as to prove the previous author results and finding.

Recommendation

The data is insufficient to be consistent with the long-term run. Hence, more data is needed to enhance the result that might explain other variables that related which can explain the macroeconomic variables impact towards stock market capitalization. Lastly, this research is not fully explain because the resources is insufficient. The data need to be more than 30 years and above so that it can explain the short-term and long-term run. Lastly, this study suggest that try to gather as many resources available so that, further research will be much more explained and useful.

References

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Babayemi, A.W., Asare, B.K., Onwuka, G.I., Singh, R.V. and James, T.O. (2013). Empirical relationship between the stock markets and macroeconomic variables: Panel Cointegration evidence from African stock markets. International Journal of Engineering Science Innovative technology (DESIT), 2(4), 394-400

Beirne, J., Caporale, G.M. and Spagnolo, N. (2009). Market, interest rate and exchange rate risk effects on financial stock returns: A GARCH-M approach, Quantitative and Quantitative Analysis in Social Sciences, 3(2), 44-68.

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Hamidah Ramlan (*)

College Business and Accounting, Universiti Tenaga Nasional, Malaysia E-mail: Hamidah@uniten.edu.my

Sahaida Laily Md Hashim

College Business and Accounting, Universiti Tenaga Nasional, Malaysia

Wan Muhammad Syahmi Bin Dolkepeli

Universiti Tenaga Nasional, Malaysia

(*)Corresponding Author
Table 1: Correlation

                        GDP                INF          ER

GDP    Pearson          1.000              0.980 (**)  -0.868 (**)
       Correlation
       Sig. (2-tailed)                     0.000        0.005
INF    Pearson          0.980 (**)         1.000       -0.870 (**)
       Correlation
       Sig. (2-tailed)  0.000 -.868 (**)                0.005
ER     Pearson                            -.870 (**)    1.000
       Correlation
       Sig. (2-tailed)  0.005              0.005
STOCK  Pearson          0.243 (**)         0.142 (**)  -0.470 (**)
MKT    Correlation
       Sig. (2-tailed)  0.00563            0.00737      0.00240

        STOCK MKT

GDP      0.243 (**)

         0.00563
INF      0.142 (**)

         0.00737
ER      -0.470 (**)

         0.240
STOCK    1.000
MKT

(**) Correlation is significant at the 0.01 level (2-tailed).

Table 2: Regression

Model  R      R Square  Adjusted R  Std. Error of  Durbin-Watson
                        Square      the Estimate

1      .832a  .692      .461        10.531         1.735

(a.) Predictors: (Constant), Exchange Rate in terms of Dollar, Gross
Domestic Product, Consumer Price Index
(b.) Dependent Variable: Stock Market Capitalization

Table 3: Anova

Model         Sum of     df  Mean      F      Sig.
              Squares        Square

1 Regression   997.176   3   332.392  2.997  0.0158
  Residual     443.567   4   110.892
  Total       1440.743   7

(a.) Dependent Variable: Stock Market Capitalization
(b.) Predictors: (Constant ER, GDP, INFLATION )

Table 4: Coefficient

Model         Unstand   ardized     Standardized     t    Sig.
              Coeffi    cients      Coefficients
              B         Std. Error  Beta

1 (Constant)   961.081  302.644                    3.176  .034
  GDP             .000     .000       2.171        1.522  .203
  INFLATION     -7.589    3.506      -3.112       -2.164  .096
  ER           -75.744   33.356      -1.294       -2.271  .086

Note: Dependent Variable: Stock Market Capitalization
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Author:Ramlan, Hamidah; Hashim, Sahaida Laily Md; Dolkepeli, Wan Muhammad Syahmi Bin
Publication:Global Business and Management Research: An International Journal
Geographic Code:9MALA
Date:Apr 1, 2018
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