REAL EXCHANGE RATE RETURNS AND REAL STOCK PRICE RETURNS IN THE STOCK MARKET OF MALAYSIA

Hock Tsen Wong ()
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Hock Tsen Wong: Faculty of Business, Economics and Accountancy, Universiti Malaysia Sabah, Jalan UMS, 88400 Kota Kinabalu, Sabah, Malaysia

The Singapore Economic Review (SER), 2019, vol. 64, issue 05, 1319-1349

Abstract: This study examines the relationships between real exchange rate returns and real stock price returns in the stock market of Malaysia. The Kwiatkowski, Phillips, Schmidt and Shin (KPSS) and Dickey and Fuller (DF) unit root test statistics show that all the variables examined are found to be stationary in the first differences. The constant conditional correlation (CCC)-multivariate generalized autoregressive conditional heteroskedasticity (MGARCH) model shows that real exchange rate return of Malaysian ringgit against the United States dollar (RM/USD) and real stock price return of Kuala Lumpur Composite Index (KLCI) are found to be negative and significantly correlated. However, there is insignificant correlation between real exchange rate return of Malaysian ringgit against Japanese Yen (RM/¥) and real stock price return of KLCI. Moreover, the CCC-MGARCH models show that real exchange rate returns and real stock price returns of some stocks are found to be significantly correlated. The KPSS unit root test statistics show that the time invariant conditional variances of real exchange rate returns and real stock price returns are mostly found to be stationary in the levels. There is no evidence of Granger causality between the time invariant conditional variances of real exchange rate returns and real stock price return of KLCI but some evidence of Granger causality between the time invariant conditional variances of real exchange rate returns and real stock price returns. There is a link between the exchange rate market and the stock market in Malaysia but not every real stock price return is significantly linked with real exchange rate return.

Keywords: Real exchange rate return; real stock price return; constant conditional correlation (CCC)-multivariate generalized autoregressive conditional heteroskedasticity (MGARCH) model; Granger causality (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1142/S0217590816500387

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