This study explores the interactions between selected macroeconomic variables and stock prices for the case of Malaysia in a VAR framework. Some conventional econometric techniques are applied along with a battery of complementary tests to trace out both short and long run dynamics. Upon testing a vector error correction model, we show that changes in Malaysian stock market index do perform a co-integrating relationship with changes in money supply, interest rate, exchange rate, reserves and industrial production index. Our lag exclusion test shows that all six variables contribute significantly to the co-integrating relationship. This shows that the Malaysian stock market is sensitive to changes in the macroeconomic variables. Furthermore, based on the variance decomposition analysis, this paper highlights that Malaysian stock market has stronger dynamic interaction with reserves and industrial production index as compared to money supply, interest rate, and exchange rate.
Key words: Stock market determinants, VAR, macroeconomic variables.
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