Abstract
This paper analyzes the relationship between stock index and macroeconomic policies (fiscal and monetary) using quarterly data for Malaysia for 1999:Q1–2011:Q4. The change in stock index was used as a proxy for financial performance. The co-integration test utilizes to detect the existence of long run relationship between stock index and macroeconomic variables and develops a vector error correction model (VECM) to test the existence of short run relationship (elasticities) among the variables. The findings indicate that there exists long run relationship among stock index, fiscal and monetary tools. This indicates that fiscal and monetary tools play an important role in accelerating financial performance in Malaysia. However, monetary tools can work faster than fiscal tools. This result would give a signal to investors to strategize their investment decision in the short and long run.
Highlights
The relationship between stock price and macroeconomics variables has been the subject of extensive theoretical and empirical research over the past three decades
The current paper analyzes the relationship between stock index and macroeconomic policies using quarterly data for Malaysia for 1999:Q1–2011:Q4
The change in stock index was used as a proxy for financial performance
Summary
The relationship between stock price and macroeconomics variables has been the subject of extensive theoretical and empirical research over the past three decades. In the case of developed countries, there are several studies that investigated the relationship between stock market and fiscal policy such as those of Afonso et al (2011), Laopodis (2009), and Arin et al (2009). Even though Afonso et al (2011) revealed that spending and government revenue have an important effect on asset market in UK; this does not represent a developing country like Malaysia. To the best of our knowledge, there are no studies related to Malaysia stock market and fiscal policy variables. This strengthens the importance of the current study and the value it adds to existing literature. There is still a question on whether fiscal policy plays an important role in Malaysia stock market, and on which policy gives the big impact to Malaysia stock market; is it fiscal or monetary policy?
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