Macroeconomic Variables and Stock Prices in Malaysia : An Empirical Analysis from the Pre-and Post July 1997 Period

This paper aims to investigate the dynamic interaction between five macroeconomic variables and the stock prices during pre-and post financial crisis in July 1997. The macro variable consists of price level, money supply, total reserve, domestic credit aggregate and industrial production. The cointegration and causality Error Correction Model (ECM) were used in this study, to analyze the dynamic equilibrium in the shortrun and long-run between macroeconomic variables and the stock prices. Moreover, it established the short-run and long-run relationship among the variables in order to test the informational efficiency market hypothesis before and after the financial crisis. The result shows that Malaysian stock prices is informationally inefficient due to money supply, credit aggregate, total reserve, price level and the industrial production during the period before financial crisis. Meanwhile, period after the financial crisis suggest that Malaysian stock market still in its informational inefficient market prior to all variable except for the total reserve which indicate the long-run predictability of Malaysian equity prices. The Granger Causality test for the period before financial crisis found that credit aggregate and total reserve has short-run relationship with the stock prices. However for the period after the financial crisis, the result suggest that the short run relationship exist among the credit aggregate, price level, total reserve and industrial production with the stock price. As a conclusion, after some new policy implemented, Malaysian stock prices are still in the informationally inefficient behavior. In addition, investors can use this information to formulate some profitable trading and it may be useful for the policy maker in choosing, planning and implemented a new policy to stabilize and maintain our economic situation.