Evidence of Stock Price Bubbles: The Case of the Malaysian Second Board Index

Abstract

There has been anecdotal evidence that the Malaysian stock market in general and the Kuala Lumpur Stock Exchange (KLSE) Second Board Index in particular have experienced several boom and bust cycles especially prior to the 1997 Asian financial crisis. This paper examines whether the KLSE Second Board Index exhibited bubble-like characteristics over the sample period from October 1991 to May 2007 by way of Shiller's (1981) variance bounds test and augmented by the tests Mankiw, Romer, and Shapiro (1985) proposed. The results clearly show that actual price volatility is greater than the ex-post price derived from the present value of actual dividends. The additional tests proposed by Mankiw, Romer, and Shapiro (1985) confirm the results. The results however are much less apparent in the post-1997 period.