The Co-movement between Exchange Rates and Stock Prices in an Emerging Market

Syajarul Imna Mohd Amin, Hawati Janor

Abstract


ABSTRACT

The aim of this paper is to examine the co-movement between exchange rates and stock prices of both the market and industries (industrial products and consumer products) in Malaysia from March 1994 to December 2013. Motivated by inconclusive evidences of previous studies to support the flow oriented and stock oriented hypothesis, the study applied error correction model including the Long Run Structural Model (LRSM) and variance decompositions to examine the relationship between exchange rates and stock prices. The findings suggest that the direction of causality runs from exchange rates to stock prices which are consistent with flow oriented theory. The influence of exchange rate, however, varies across industries with importing firms appearing as the most affected; indicating that Malaysian market is not homogenous. The major policy implication that can be deduced from the study is that active policy on currency management through monetary instrument (i.e. interest rates) will be helpful to stimulate the development of stock market in emerging countries like Malaysia.

Keywords: Exchange rates; stock prices; LRSM; variance decomposition; error correction model

ABSTRAK

Kajian ini bertujuan untuk mengkaji pergerakan bersama antara kadar pertukaran dan harga saham kedua-dua pasaran dan industri (produk industri dan produk pengguna) di Malaysia dari Mac 1994 hingga Disember 2013. Didorong oleh bukti-bukti yang tidak meyakinkan daripada kajian lepas untuk menyokong hipotesis orientasi aliran (flow oriented) dan orientasi saham (stock oriented), kajian ini dilaksanakan untuk meneliti hubungan antara kadar pertukaran dan harga saham dengan menggunakan model pembetulan ralat (error correction model) termasuklah Model Struktur Jangka Panjang (Long Run Structural Model [LRSM]) dan penghuraian varians (variance decomposition). Hasil kajian menunjukkan bahawa arah penyebab berlaku dari kadar pertukaran kepada harga saham yang konsisten dengan teori orientasi aliran. Pengaruh kadar pertukaran, bagaimanapun, berbeza-beza di antara industri dan didapati bahawa syarikat pengimport adalah yang paling terjejas, yang menunjukkan pasaran Malaysia tidak seragam. Implikasi dasar utama yang boleh disimpulkan dari kajian ini adalah bahawa dasar aktif dalam pengurusan mata wang melalui instrumen kewangan (iaitu kadar faedah) akan membantu merangsang pembangunan pasaran saham di negara-negara membangun seperti Malaysia.

Kata kunci: Kadar pertukaran; harga saham; LRSM; penguraian varians; model pembetulan ralat


Keywords


Exchange rates; stock prices; LRSM; variance decomposition; error correction model

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