THE DYNAMIC RELATIONSHIPS OF MACROECONOMIC VARIABLES AND STOCK INDEX: STUDY OF MALAYSIA AND SINGAPORE

Sarah Yap Siong Yen

Bachelor of Finance (Honours) 2012

Pusat Kbidmat MakJumat Akadtmik UNlVERSm MALAYSIA SARAWAK

P.KHIDMAT MAKLUMAT AKADEMIK UNIMAI

1111111111111111111111111 1000245039

HUBUNGAN DINAMIK ANTARA PEMBOLEHUBAH MAKROEKONOMI

DAN INDEK SAHAM: KAJIAN DI MALAYSIA DAN SINGAPURA

SARAH YAP SIONG YEN

Projek ini merupakan salah satu keperluan untuk

Ijazah Sarjana Muda Kewangan dengan Kepujian

(Kewangan)

Fakulti Ekonomi dan Perniagaan

UNIVERSITY MALAYSIA SARA W AK

2012

I

J

J

I

THE DYNAMIC RELATIONSHIPS OF MACROECONOMIC VARIABLES

AND STOCK INDEX: STUDY OF MALAYSIA AND SINGAPORE

SARAH YAP SIONG YEN

This project is submitted in partial fulfillment of

the requirements for the degree of Bachelor of Finance with Honours

(Finance)

Faculty of Economics and Business

UNIVERSITY MALAYSIA SARA W AK

2012

PENGESAHAN PELAJAR

Saya mengakui bahawa Projek Tahun Akhir bertajuk

"Hubungan Dinamik antara Pembolehubah Makroekonomi dan Index

Saham: Kajian di Malaysia dan Singapura"

ini adalah hasil kerja saya sendiri kecuali

nukilan, petikan, huraian, dan ringkasan yang

tiap-tiap satunya telah saya nyatakan sumbemya.

'J.l/ obI I~ r ' -=--~= (Tarikh serahan) (Tandatangan Pelajar)

Sarah Yap Siong Yen 24960

ST A TEMENT OF ORIGINALITY

The work described in this Final Year Project, entitled

"The Dynamic Relationships of Macroeconomic Variables and Stock Index:

Study of Malaysia and Singapore"

is to the best of the author' s knowledge that of the author except

where due reference is made.

(Student's signature) Sarah Yap Siong Yen 24960

ACKNOWLEDGEMENT

In the name of GOD, I would like to express my deepest gratefulness for giving

me the best heaLth condition, courage and strength throughout the completion of this

paper.

It also gives me the greatest pleasure to express my sincere gratitude to my

supervisor, Dr Harry Entebang, who being encouraging, helpful and tolerant along the

period of completing this paper.

I would like to thanks to University Malaysia Sarawak for giving me the

opportunity to conduct this paper and providing fund to buy the materials that is

required to complete this paper.

Thanks also to my family members who inspired and supported me during the

completion period.

Last but not least, thanks to all of my lecturers, friends and relevant personnel who

helped in one way or another for me to successfully complete this paper.

ABSTRACT

THE DYNAMIC RELATIONSHIPS OF MACROECONOMIC VARIABLES

AND STOCK INDEX: STUDY OF MALAYSIA AND SINGAPORE

By

Sarah Yap Siong Yen

Malaysia and Singapore once used to be under the same ruling and sharing the stock

exchange. However, the split of Malaysia and Singapore causes the stock exchange to

split too and both countries move into different direction of economic development.

Malaysia is known as the Emerging Tiger and Singapore is the Asian Tiger. Therefore,

this paper will serve to find out the dynamic relationships of the variables using the

Efficiency Market Hypothesis (EMH) theory. The dynamic relationships will be

measure using the long run and short run relationship which will be examine using the

Johansen and Juselius Cointegration Test and Granger causality Test respectively. The

variables of study are included the Industrial Production Index, Consumer Price Index,

Real Effective Exchange Rate and Stock Index. The outcome of this paper suggests that

both of the stoCK markets are infonnational ineffici~ncy.

Key Words: EMH, Macroeconomic Variables, Stock Index, Cointegration, Causality

LIST OF TABLES

Table 1: Unit Root Tests on Level and First Differences .............................. 50

Table 2: Johansen and Juselius Co integration Test ..................................... 51

Table 3: Granger Causality Test. . . . .. ....... .... ............ ..... . . ... .. ...................53

,,

viii

l

LIST OF FIGURES

Figure 1: Theoretical Framework ... .......... .. ............ .. .... ................. . . . .... 30

Figure 2: Conceptual Framework ....................................... .. ................ 33

Figure 3: Malaysia UPI ................. ......... ...... .. ................ . ... ...... .. ....... 43

Figure 4: Singapore UPI.. ............ ............ .......... .............................. . 43

Figure 5: Malaysia LCPI.. ................................................................. 45

Figure 6: Singapore LCPI .................. ~ ..... ... ..................... .. ................ 45

Figure 7: Malaysia LREER .. . ......... .. .. ........ .. ... . .. ...... .. . . .... .. . ............... 46

Figure 8: Singapore LREER . .... ........... .... ... . ........... ............................ .47

Figure 9: Malaysia KLCI ...... ...... .. ..... , ..... ..... .... . ... ........................ .... 48

Figure 10: Singapore LSTI . .. .. ... ............................ . ....... ... . . ..... .... ... ... 48

, \

ix

I

ACRONYMS

EMH Efficiency Market Hypothesis

IPI Industrial Production Index

CPI Consumer Price Index

REER Real Effective Exchange Rate

FfSE Bursa Malaysia KLCI FTSE Bursa Malaysia Kuala Lumpur

COIp.posite Index

STI Straits Times Index

x

Pusat Khidmat MakJumat Akademik UNlVERSm MALAYSIA SARAWAK

T ABLE OF CONTENT

Page

LIST OF TABLES viii

LIST OF FIGURES xi

ACRONYMS x

CHAPTER 1: INTRODUCTION

1.0 Introduction ... ....... .. ........ .. ....... ... ....... .. . .. ... ... ....... ....... .... . . . .......... I

1.1 The History and Perfonnance of Malaysian and Singaporean Stock Exchange ... 3

1.2 The Economic of Malaysia and Singaf)ore . . ...... .. . . . .. ..... . ...... . .... . .. .... ... . ... 6

1.3 ProblelTI Statement. . ... ... . . .... . . ..... .. ... . ..... . ....... . ...... . . " ........ . ........ . .. .. . 8

1.4 Research Questions .... .. ........ . ........ . .... . .... .. . .. ..... .. .... . . ... .. . . . . . . . . ..... .. . . I 0

1.5 Research Objectives .. .... . . . ........ ... ... ... ........ . ... . .. . . . . ....... ... . . ........ ..... . . 1 0

1.6 Significance of Study.. . .. . ... ...... .... ... .. . ... ....... .. .. .... .. . . ....... . ........ . . .. .... 11

1.7 Scope of Study... ......... .. . ..... .. . ...... ... .. ...... ... .... . .... . ... .. .. ..... ..... . . .. . . . . 12

1.8 Summary... : . .. ...... ....... ..... .. ....... ...... .. ... ...... . . .... . ....... . . . ... ..... . ....... .. 1 3

CHAPTER 2: LITERATURE REVIEWS

2.0 Introduction ... . . .. .... . .... ....... . ....... . .. ... ..... .. ..... . . .. . . .. ... .. ....... . . .. ... .... . . 14

2.1 The Dynamic Relationship between Variables .. . '" . ...... .. .. .. . ... . ...... ... ..... .... 14

2.1.1 Economic Activity and Stock Price ....... . . .................. ... ....... .. ..... 17

2.1.2 Inflation and Stock Price ...... .. ........ .. ...... ... .. . . ... .. ..... .. . . . . . . . ... . 0018

- - --

2.1.3 Exchange Rate and Stock Price ..... ........... ...... .. .........................20

2.2 Selection of Countries......... ....... ..... ... ...... ..... . ... . ................................21

2.2.1 Malaysia .............. .... .................... ....... ...............................22

2.2.2 Singapore... ........ . .......... ...... .... . ........ . ...... .... . ... ............. ... .. .24

2.3 Modeling................................................................. .. ... ................ .25

2.3 .1 Theory................... ..... ................... .... ............ ............. ....... 25

2.3.2 Unit Root. ......................... .. . ....... ....... ..... .. ...... .. . .. ...... .... .... 26

2.3.3 Dynamic Relationship Test. .... . .. .. ............................................27

2.4 Theoretical Framework ........ . . ............. ....... ... . .. ................................. 30

2.5 Summary..... . .... .... ............. .. .................. .... . .. .... .... ... . .. .... . ...... .......31

CHAPTER 3: METHODOLOGY

3.0 Introduction..... . ........ ........ ......•....... ......... .... .. ... .............. .. .. ..... .... 32

3.1 Conceptual Framework ............... . ............................................... '" ... 32

3.2 Hypothesis .. ....... .. .. ... ........... .......... .. .... .... . ......... .......... . . .. . ......... ...34

3.3 Data Descriptions ...... ...... '" . ...... . ............. '" '" ., ... ..... ....... ........... ......35

3.3.1 Stock Index ................. .... .................. '" ...... ...... . . . . ....... . . ..... 36

3.3.2 Industrial Production Index ...... ..... .... .. ................................. . ..36

3.3.3 Consumer Price Index ... ........... ... ... ...... ......... . .................. .. ... 37

3.3.4 Real Effective Exchange Rate .. . ...... ..... ............. ........ . ..............37

3.4 Data Collection .. ... ... ..... .... ... . ..... : ...... . ........ . ................................... 38

3.4.1 Data Sampling ........ ... ............ ...... . ...... ........... .......... ...... .....38

3.4.2 Data.............................. ..... .............................................38

3.5 Data Analysis ...... ... ... . . . ......... .............. .. . ...... .... ..... .. .. .. .... . ...... .. ... .. .39

r

3.6 Summary.............................. ... . ... ..... .. . . ....... . ........... . ..... . .... . . .... . .. 41

CHAPTER 4: RESULT

4.0 Introduction.. ...... . ..... . .. .. .. .. . .. ..... ............. . .. ........................ ... . . . .... 42

4.1 Trends of All Macroeconomic and Stock Market Variables ............... . ..........42

4.1.1 LIPI. .. . .. . .. . .. ...... .. ..... . ....... ..... .... . . .. ........... . .. .. .. . ..............43

4.1.2 LCPI. .............. ... .................. ..... . .. .. ... ..... .. . . .. ... ....... .. .. . ... 45

4.\.3 LREER ........... ... . ...... .. .... ......... .. . .. .... .. . ... .. . ... .. ....... ....... . . 46

4.1.4 Stock Index .. . ....... .... ....... . ........................ ... . . ..... . ........ .. .. . 48

4.2 Unit Root Tests on Level and First Differences ......... .. ........ ................ .....50

4.3 Johansen and Juselius Cointegration Test. ............... . ..... .... . ...... ..... .........51

4.4 Granger Causality Test. .......... . .. ... ... . .. . .... . .... . .... ... . .. .. .. .. . ..... . .. ... . ...... 53

4.5 Summary..... . . .... ... . . ... . .. . ........ ~ .. .. ....... .. . . . . ... .. .. . ... . . .. ... . . . .... . ... . .. ... 55

CHAPTER 5: CONCLUSION, POLICY IMPLICATION AND LIMITATION

5.0 Introduction .......... . . .. . . . ..... . .. ...................... . ... .. . .. . .... .. ' " ........ . . . .... 56

5. \ Summary of Finding................................................. .. .. . ................. 56

5.2 Policy Implications .............. .. .. . ....................... ..... . ...... . ..... .. .. .........58

53 Scope of Future Research . .... . ...... ............... ... ... ............... ... .. .............59

5.4 Limitation..... .... ... ... .. ..... .. ..... ... .. ..... ........ ...... .. ....... ...... ... ..... .... ... .... .........................60

5.5 Summary... .. . ... .. .. ... . . .. . ... . . .. . . ........ ...... ... ........... .. ... .. ..... . .... . .... .. .. . 60

.. REFERENCES 61

CHAPTER I

INTRODUCTION

1.0 Introduction

In the year 1963, it was a significant year as Malaysia is fonned with the

entry of Malaya, Singapore, Sabah and Sarawak. The Malaysian stock exchange was

known as Stock Exchange of Malaysia back then. However, there was a massive

change in history of Malaysia in 1965 as Singapore leaved Malaysia due to

difference ideologies. The stock market for these two countries did not diverge

immediately but was only separated ~hen the currency value went different. The

separation leads to the fonnation of Kuala Lumpur Stock Exchange Berhad and

Stock Exchange of Singapore which were the stock exchange for Malaysia and

Singapore respectively. From then on, the economy perfonnances for these countries

differ due to various reasons. One of them is geographical factor as Singapore is an

island and Malaysia is a mainland. This has caused the difference in developing

structure with Malaysia's economic focused on their agricultural activities due to its

rich resource of land whereas Singapore' s economic activity focused on seaport and ,

financial services due to its strategic place as hub. Therefore, this paper will be

examines the dynamic relationship between macroeconomic variables and stock

index in Malaysia and Singapore.

1

The dynamic relationships were widely debated among the researchers for "

the past few decades. In addition, the researchers came out few important theories in

explaining the relationship which include the Random Walk Theory, Efficiency

Market Hypothesis and so on so forth. In this paper, the linkage between the

macroeconomic variable and the stock index will be explained based on Efficiency

Market Hypothesis (EMH). According to Fama and Laffer (1971), EMH explained

that the investors may refer to relevant information to predict the stock market

performance accordingly to the form of the market. There were three types of

market in the EMH which are the weak, semi-strong, or strong form. This theory is

relevant to the objective of this paper which is to identify the relationship of the

macroeconomic variables (information) and stock index for two different types of

market performance countries. The Singapore is the Asian Tiger which is the

developed market and Malaysia is th~ Emerging Tiger which mean the emerging

market.

This paper will employed few tests in order to determine the dynamic

relationships between macroeconomic variables and stock market index. In depth of

the dynamic relationship, it can basically be divided to two which are the long run

and short run relationship. The cointegration of the variable will explain the long run,

whereby the granger causality explains the short run. Furthermore, the

macroeconomic variables that have b~en chosen for this study are Industrial

Production Index, Consumer Price Index, and Real Effective Exchange Rate. The

timeline used for these selections of data will be from January 1996 until December

2009.

2

This paper will then be organized as follow. Chapter 2 will be the literature "

reviews from the previous studies of this research topic. This is important as it shows

us a basic understanding of this topic and thus can assist us to improve on it.

Methodology for this research will be in Chapter 3. This chapter will layout the

foundation of my analysis as it provides formulas used to examine the topic. Next

will be the Chapter 4 which consist the result and the discussion of the analyses. This

chapter will be illustrating the outcome of the result. Finally, this study will be

concluded in the Chapter 5. In the Chapter 5, the policy implication and the

limitation will be discussed too.

1.1 The History and Performance of Malaysian and Singaporean Stock

Exchanges

Stock market is the place where the public listed companies may pump in the

public money as the capital for the company and the public will be paid dividend in

return of the capital invested. According to the Bursa Malaysia (2011), in the year

1930, the Singapore Stockbrokers' Association was established and it changed its

name to Malayan Stockbrokers' Association after the re-registration in 1937. The

public hare trading begins in Singapore and Kuala Lumpur in year 1964 when the

Malayan Stock Exchange was established. After the formation of Malaysia, Malayan

Stock Exchange changed to Stock Exchange of Malaysia. Although Singapore

withdrawn from Malaysia in year 1965, the stock exchange was not separated and is

still known as Stock Exchange of Malaysia. Yet, in year 1973, it was separated into

3

two which are Kuala Lumpur Stock Exchange Berhad and the Stock Exchange of "

Singapore due to the difference in cun'encies values.

On the other hand, stock index is a number that comprise from the stock price

of the selected stock in portfolio to act as an indicator of the price for the portfolio

and been use to measurement the market rate of return and risk (Brown & Reilly,

2009). Therefore, the stock index will be used to measure the performance of stock

exchange. In this paper, the FTSE Bursa Malaysia Kuala Lumpur Composite Index

(FfSE Bursa Malaysia KLCI) and Straits Times Index (STI) are chosen as the

representative of the Malaysia and Singapore stock index, In addition, the index are

detennined by full market capitalization which comprised of top 30 selected main

board listed companies which make both are relevant to be compared. Next

paragraphs will illustrate further on Malaysian and Singaporean stock exchanges

history and performance.

In the Malaysian stock exchange, Kuala Lumpur Stock Exchange Berhad was

taken over by Kuala Lumpur Stock Exchange (KLSE) when it is incorporated as a

company limited by guarantee on 14 December 1967. After all on 14 April 2004,

KLSE change their name to Bursa Malaysia. Bursa Malaysia turned to be a better

competitive advantage as focused to be more customer-driven and market-oriented.

FfSE Bursa Malaysia KLCI is transition of Kuala Lumpur Composite Index (KLCI)

which was established in 1986 and also the most representative Malaysia stock

market index, This transition happened on 6 July 2009 due to partnership of FTSE

group and Bursa Malaysia in 2006. Furthermore, there are thirteen indices in Bursa

Malaysia that collaborate with FTSE group. All of the indices in Bursa Malaysia are

comprised according to FTSE Bursa Malaysia Ground Rules to provide domestic 4

Pusat Khidmat Maklumat Akademik Ul\lVERSITl MALAYSIA SARAWAK

and international investors a clearer vision and disclosure infonnation for investment.

Moreover, Bursa Malaysia uses the value-weighted to compute the stock market

index. Brown and Reilly (2009) states that value-weighted index is developed

through the chosen stocks ' initial total market value. Generally, value-weighted

index will be adjusted to free floating factor as number of shares outstanding is chose

for calculation. Therefore, the objective of establishment of FTSE Bursa Malaysia

KLCI is to measure the perfonnance of Malaysian stock markets and it would serve

as the best perfonnance indicator. It is a stock market index generally accepted as the

local stock market barometer. The perfonnance of FTSE Bursa Malaysia KLCI for

the past thirty four years was at its market value averaged 676.05 points with the

lowest at 89.04 points in April 1977 and highest peak at 1594.74 points in July 20 II

(Trading Economics, 20 I I).

After the independence of Singapore In 1965, Singapore dollar were

introduce as the own currency which was still equal with Ringgit Malaysia back then.

After eight years, Singapore dollar values are interchangeability I with Malaysia and

Brunei. This explains why the separation of the two stock markets only occurred

after eight years of Singapore independence as there was no difference in the

respective currency. In year 1973, the Stock Exchange of Malaysia and Singapore

was separate and Stock Exchange of Singapore (SES) was established after the

discontinuation of the currency interchangeability between Malaysia and Singapore.

However in year 1999, SES merged with Singapore International Monetary

Exchange (SIMEX) to fonned Singapore Exchange. According to ADVFN (2011),

stocks trading are in SES, while futures exchanges are in SIMEX since 1984. The

I Situation where the assets are considered equivalent value due to it similarity 5

Straits Times Index also used full market capitalization for their performance

indicator which comprised top 30 selected main board listed companies. It has the

similar characteristics as FTSE Bursa Malaysia KLCI. This makes both of these

indices are suitable for comparison. The performance of the Straits Times Index for

the past twelve years was at its market value averaged 2292.40 points with the

lowest at 1170.85 points in March 2003 and highest peak at 3831.19 points in

October 2007 (Trading Economics, 2011). Therefore, the stock indices for both of

the countries came from similar background.

1.2 The Economic of Malaysia and Singapore

In the Asian economic, there are four Asian Tigers which include Singapore,

Hong Kong, South Korea and Taiwan; and three Emerging Tigers which include

Malaysia, Indonesia and Thailand (Billington, 1997). The title of Asian Tigers and

Emerging Tigers entitled according to the economic performance of the country.

However, this paper will mainly concentrate on the country's macroeconomic

performance.

During 1970s, Malaysia altered the economic policy from agricultural to

industrial and emerged as new industrializing economics in 1985. After the alteration

of the economic policy, Malaysia managed to increase Industrial Production Index

which led to the economic growth rate at 9% per year. This has make Malaysia to be

more attractive to the foreign investors as the economy perceive a good environment.

6

In addition, Malaysia entitled as the Emerging Tiger due to the economic is in the ~

developing stage but the country's aim is to be the fifth Asian Tiger. However, the

dream shattered after the East-Asian Crisis of 1997 that hits the country economy

especially the currency by speculator. This has dampened the economic growth of

the country and bearish of the stock exchange. This crisis has attacked the currency

and affected the exchange currency rates and interest rate in the country. The

beari h of the stock market is due to the capital flighe, asset price deflation, and low

liquidity market (Sundaram, 2006). Malaysia managed to overcome the crisis impact

in year 1999-2000 and recovered the economy and stock exchange performance. In

the second financial crisis or the Subprime Mortgage Crisis of 2008, the impact on

the Malaysia economy and stock market is low due to the un-pegging of Ringgit

Malaysia from United States dollar (U.S. dollar) in 2005. Besides that, Malaysia

learns the lesson after the East-Asian-Crisis to reduce the risk in involving financial

crisis by maintaining the strong foreign exchange reserves and low external debt.

On the other hand, Singapore is the Asian Tiger which indicates that the

economic is well developed. Singapore is a small country with a strong economy

which is mainly depending on four areas. The areas are the cargo seaport, financial

services, tourism and the exportation of electronic manufacturing and machinery

(Janus Corporation Solutions, 2011). Singapore market is wide'ly known and has

been ranked as the world's second most open economy by the Heritage Foundation's

Index of Economic Freedom due to its stability and transparency (The Heritage

2 Investors moved their securities out of a particular country because of a fear of country-specific risks or political instability, or because of the lure of higher returns in a different country.

7

Foundation, 20 II). Singapore market started since the independence on 9 August

" 1965. During the East-Asian Crisis of 1997, Singapore economy manages to

maintain it stability. However, Singapore was affected by the subprime mortgage in

2008 because the expOiting markets are been affected. This has caused the instability

of growth rate since year 2008 to 2011 especially in the Gross Domestic Product.

The instability led to a resilience package3 to overcome the economic downturn as a

move to recover their economy. Singapore managed to recover their economy from

the crisis in a short time; yet the stock market performance is not stable due to the

exchange rate and interest rate of the country. The country has brought upon lot of

inve tors to invest in the country but the high rate of floating of U.S. dollar has

caused the Singapore dollar to appreciate further until it harm the country. The

appreciations had increase the inflation and lower the interest rate which influenced

stock exchange performance because' investors have doubts on the economy stability

to enter the stock exchange. Thus, the relationship of the macroeconomic

perfonnance and stock exchange performance are dynamic. This research will be

investigating further the relationship.

1.3 Problem Statement

The relationships of macroeconomic variables and stock index were always

an ongoing issue as it is significant for the country future development. Hence, the

research to determine the relationship between stock index and macroeconomic

3 Economic stimulus plan worth 5$ 20.5 billion to help Singaporeans keep jobs and viable companies stay afloat

8

variables is highly recommended among the researchers (Aydemir & Demirhan, "

2009). Furthennore, the relationships may differ under different circumstances.

According to Iqbal (200 I), emerging market may face major challenges in

maintaining macroeconomic stability. Therefore the relationship between the stock

index and macroeconomic variables for Malaysia and Singapore should be examine

as both of these countries show similarities and differences that are notable for

comparison.

Firstly, the dependent variable of this study which is the stock index is

formulated using the same method. The FTSE Bursa Malaysia KLCI and the STI are

calculated based on the full market capitalization method by comprising the top 30

selected main board listed companies. Secondly, the history of Malaysia is the unity

of Malaya, Sabah, Sarawak and Singapore. Therefore, Singapore used to be under

the same rul ing with Malaysia whom under the leader of Tunku Abdul Rahman.

Besides that, these two countries had shared the same stock exchange even before

the formation of Malaysia. The public trading was made in Kuala Lumpur and

Singapore under the supervision of Malayan Stock Exchange which renamed as

Stock Exchange of Malaysia soon after the fonnation of Malaysia.

However, Singapore left Malaysia in the year 1965 due to the different

ideologies and led to the differences of these countries became contrast. Firstly, the

economics of the country which Malaysia is just the Emerging Tiger and Singapore

is the Asian Tiger. The different entitlement can be explained due to the different

economic activities that been focuses by the country. Secondly, both of the countries

stock market sensitivity is different. The East-Asian Crisis of 1997 has greater

impact on Malaysia economy whereas the Subprime Mortgage Crisis of 2008 has 9

greater impact on Singapore economy. Nonetheless, both countries managed to

recover from the crisis in short period of time.

Hence, this study would like to find out how the dynamic relationships of the

stock index and macroeconomic variables in Malaysia and Singapore will be due to

the similarities of the stock market and the differences of the economy.

1.4 Research Questions

This study aims to answer the following questions:

• Is there any long run relationship between macroeconomic variables and

stock index in two selected cou~tries of Malaysia and Singapore?

• Is there any short run rdationshlp between macroeconomic variables and

stock exchange index in two selected countries of Malaysia and Singapore?

1.5 Research Objectives

Generally, this paper will detenrune the dynamic relationships of

macroeconomics variables and stock index in the two selected countries of Malaysia

and Singapore. Therefore, to determine the dynamic relationships, the cointegration

10

and the Granger Causality of the variables will be test to find out the long run and ., the short run relationships.

Specifically, this paper consists of two objectives, which are:

• To determine the long run relationships between macroeconomic variables

and stock exchange index in two selected countries of Malaysia and

Singapore.

• To discover the short run relationships between the macroeconomic variables

and the stock exchange index in two selected countries of Malaysia and

Singapore.

1.6 Significance of Research

The objective of this paper is to determine the dynamic relationships of

macroeconomic variables and stock index which will be significant for the

achievement of the market efficiency and also for the country future development. In

modem economy, the dynamics relationship has played an important role in

forecasting the future of the variables. Therefore, this paper will be useful for the

following audiences:

• Investors and portfolio managers - Provide useful information to pin point

the competition among the profit-maximizing investors in an efficient market

to ensure the effective investments decision can be made.

11