A Study of Share Market Dynamics in Malaysia

This paper examines the long-run relationships and short-run dynamic interactions between stock prices and macroeconomics variables in Malaysia over the period 1990-2010 by employing multivariate cointegration techniques and vector error correction model. The results of cointegration tests suggest that share prices in Malaysia generally display a long-run equilibrium relationship with inflation rate, exchange rate, industrial production, average lending rate, growth of money supply, oil price and US share price. A contemporaneous error correction model has stronger explanatory power than a model with lag variables in explaining short-term relationship. As for short-run dynamic interaction, we find exchange rate, average lending rate, US share price exhibit causal relationships with share price and these variables are significant in explaining share price movement.