Granger Causality Relationship between Malaysia Equity Market and Exchange Rate Volatility

Abstract

The relationship between equity market and exchange rates has often been discussed by economists since them both play important roles in influencing a country’s economic development. Therefore, the objective of this study is to examine the Granger causality effect between Malaysia equity market and exchange rate volatility. The focus of this study is on the overall and sectoral performance of the Malaysian stock market with Malaysian ringgit exchange rate volatility. The multivariate vector autoregression (VAR) framework estimations were utilized to capture the interactions between the equity market performance and exchange rate volatility. In the overall market performance, the results showed that there was a feedback interactions between Malaysia equity market and exchange rate volatility. However, in terms of the sectoral market performance, only the Industrial and Finance sectors that showed similar results as the overall market. Based on the findings, it is important for the Malaysian government to be cautious in their implementation of equity market and exchange rate policies especially those related to the Industrial and Finance sectors because such policies would impact these sectors

The Granger causality effect between the stock market and exchange rate volatility in the ASEAN 5 countries

“…Our results are consistent with [13] and [20], which showed that stock prices are causally linked, in the Granger sense, to exchange rate volatility with feedback interactions. This relationship is not unexpected, because when stock market is bullish, foreign investors would come and invest in Malaysia and ringgit values would appreciate and vice versa.…”

“…And when ringgit values are volatile, foreigners would not want to hold Malaysian stock fearing the foreign exchange risk incurred and thus would affect the equity market in Malaysia. We also found bi-directional effects running between money supply and exchange rate volatility, which contradicts the results found in [20] that showed no Granger causality between money supply and exchange rate volatility. The difference could be due to the different time periods for both studies.…”

“…The theoretical explanations indicate the existence of some other variables, which may interact with exchange rates and stock prices. In fact, further studies have been carried out employing a multivariate framework, including [13] [18] [19] [20].…”

Effects of Interest Rate and Exchange Rate on the Stock Market Performance of Pakistan: A Cointegration Approach

“…Some of the studies recommend that there exists a direct correspondence between the stock prices plus the exchange rate, for instance, Aggarwal [29], Smith [30], Sabri [31], Ahmad et al [5], etc. In contrast, other empirical works have concluded a converse link between equity prices and currency rates, and such studies include Soenen and Hanniger [32], Granger et al [33], Yusuf and Rahman [34], etc. Hence, we expect > 0 or < 0.…”

Financial crises, Asian stock indices, and current accounts: An Asian-U.S. comparative study

“…Hussin et al (2012) in discussing the Malaysian Islamic stock market from 1999 to 2007, exclude both the beginning of the AFC and the entirety of the GFC from their study. Md-Yusuf and Abd Rahman (2013) suggest that there has been a two-way interaction between the equity market and exchange rate volatility, but do not include financial crises in their Granger causality analysis.…”