Modeling the Relationship between KLCI and Monetary Policy after 1997 Asian Financial Crisis

Abu Hassan Shaari Md Nor, Ruzita Abdul Rahim, Hamizah Mohd, Zaidi Isa, Ugur Ergun

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.

ABSTRAK
Menggunakan ujian kointegrasi multivariat Johansen dengan selaan struktur dan sebab-akibat Granger berdasarkan model pembetulan ralat vektor, interaksi antara harga saham (KLCI) dengan pemboleh ubah dasar monetari (M1, M2 dan kadar pasaran wang (MM)) dikaji di Malaysia menggunakan data bulanan bagi tempoh selepas krisis kewangan Asia 1997 antara Januari 2000 hingga Mei 2008. Empat rumusan utama diperoleh daripada hasil kajian. Pertama, bukti mengenai hubungan kointegrasi dikesan hanya apabila selaan struktur diambil kira dalam model. Kedua, di kalangan pemboleh ubah monetari, hanya kadar faedah (MM) mempunyai hubungan jangka pendek secara langsung dengan harga saham manakala hubungan antara agregat monetari dengan harga saham adalah secara tidak langsung melalui MM. Ketiga, ketiga-tiga pemboleh ubah monetari secara konsisten menunjukkan kesan jangka panjang ke atas harga saham. Keempat, antara dua agregat monetari, M2 secara konsisten menyerlah sebagai mekanisme dasar monetari yang efektif manakala M1 gagal melaksanakan fungsi tersebut. Implikasi dasar dari kajian ini adalah Bank Negara Malaysia boleh bergantung kepada kadar faedah berbanding penawaran wang sebagai mekanisme jangka pendek untuk menguruskan pasaran saham secara efektif. Walau bagaimanapun, dalam jangka panjang, kedua-dua kadar faedah dan penawaran wang boleh diharapkan untuk mengawal selia kedudukan pasaran saham. Para pelabur sementara itu boleh mentafsirkan hasil kajian ini sebagai bukti sokongan bahawa pasaran saham di Malaysia masih belum cekap. Sehubungan itu, mereka harus mengeksploitasi maklumat baru yang tercetus daripada perubahan dasar monetari untuk merangka strategi pelaburan masa depan.


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