Recently, the volatility of the Kuala Lumpur Composite Index has been of concern to investors, analysts, brokers, dealer and regulators. Stock market prices volatility which represents the variability of stock price changes could be perceived as a measure of risk. The understanding of the volatility in a stock market will be useful in the determination of the cost of capital and in the evaluation of asset allocation decisions and also for portfolio selection. Policy makers therefore rely on market estimates of volatility as a measurement of the vulnerability of financial markets. However, the existence of excessive volatility in the stock market undermines the usefulness of stock prices as a benchmark of the informational efficiency of markets (Karolyi, 2001).
On this study, researcher wants to observe the effects of the different macroeconomic variables (interest rate, gross domestic product and inflation) on the stock market prices in Malaysia. The rest of this paper is organized as follows: Chapter two review of the related literature chapter three discusses research methodology. Chapter four discusses finding and analysis and conclusion and recommendation Chapter five.
OVERVIEW OF MALAYSIA ECONOMIC
Malaysia, one of the world's most successful in plantation, celebrated a half-century of independence on 31th August 1957. From a 1950's economy dependent on tin mining, rubber and palm oil plantations, the country today has a modern economy and an inspiring in infrastructure sector.
The Petronas Twin Towers, the third tallest buildings in the world together with the new government administration centre Putrajaya, south of Kuala Lumpur, symbolize an impressive record of success of Malaysia. And it showed the Malaysia growth economic.
A survey by Swiss bank UBS in 2006, ranked Kuala Lumpur the cheapest of 71 global cities.(Bank Negara Website,2006)
According to Bank Negara Malaysia Governor Zeti Akhtar Aziz said the central bank is keeping its 6% growth target, citing strong private consumption and investment spending and a rise in government development spending as factors supporting stronger second-half performance.
While, the other services sector developed 9.7% from a year earlier compared with previous 9.2% growth in the first quarter, boosted by financial services, tourism, transport and communications.(Bank Negara Website)
Manufacturing moderated to 1.5% compared with a revised 2% in the first quarter and below the 8.4% a year earlier, partly due to weaker exports according to Asia-Pacific Business News - Week August 31, 2007 by Finfacts Team Sep 1, 2007.
According to Zeti the country's "interest rate is still supportive of the economy" and she said that there is no need to cut rates and the benchmark overnight policy rate is at 3.5%. By these factors it will affect economic growth in Malaysia.
OVERVIEW OF THE KUALA LUMPUR COMPOSITE INDEX
Kuala Lumpur Composite Index was introduced in 1986 as a benchmark of the market performance for Malaysian equity market. The companies that make up the KLSE composite index are some of the Malaysian's companies which are following the criteria to be listed in Main Board and Second Board.
The buying and selling of shares in Malaysia have been recorded as early as 1870 and represented the first instance of any form of securities market in the country. Although a stockbroker association, known as the Malayan Stockbroker's Association, was form in 1937, public trading of shares was not undertaken until May 1960 upon the initiative of Central Bank. The stockbroker's association was then recognized in the same year to become the Malayan Stock Exchange. The exchange was subsequently recognized and remains as Stock Exchange of Malaysia in 1963, the Stock Exchange in Malaysia and Singapore in 1965 and the Kuala Lumpur Stock Exchange (KLSE) in 1973. Finally, it changes its name to Bursa Malaysia Securities Berhad (Bursa Malaysia) on 18th March 2005. (Bursa Malaysia)
Close link has always existed between Bursa Malaysia and Stock Exchange of Singapore (SES) due to historical factors with dual-listing on companies on both exchanges. Following the government decision to develop Bursa Malaysia as an independent exchange and to enable Kuala Lumpur further grow as an important financial center; a directive was issued on November 9th, 1989 which figures all Malaysian-incorporated companies to be listed from the SES by December 31st in the same year. This would enable Bursa Malaysia to generate greater international interest and at same time reduce its vulnerability to unfavorable development of SES.(Bursa Malaysia)
Bursa Malaysia has faced rapid development year to year in standardized with the good economic growth. Today, Bursa Malaysia has transformed itself into one of the largest and most modern bourse in the developing world. In 1960, Bursa Malaysia consist of only four stockbrokers but now, Bursa Malaysia become strong stock market in the ASEAN region and the fifth largest in terms of market capitalization. The factor that Bursa Malaysia become strongest and largest stock market in Asean because of Tenaga Nasional Berhad, one of the listed company recommend the largest issue which are amounted of RM 3.2 billion in 1992, because of the government policy.
Bursa Malaysia has been an important institution for the development on Malaysia as it provides the movement of the investment funds which results in develop economic performance. Although bank borrowing remained a major source of financing, companies found it method to resort increasingly to alternative financing from the stock market, which is less costly. Through Bursa Malaysia, the listed companies raised their capital by inviting the public to lend or to participate in the business by purchasing shares in exchange for a share in future profits. Though this means, they can hit the savings of person in the country as well from investors abroad which are including international trade.
Formerly, allocate trading in Bursa Malaysia is done on two trading boards, namely the Main Board and Second Board. The Main Board is consist of companies that has paid up capital not less than RM40 million while the Second Board is for smaller companies, with a minimum paid up capital of RM10 million but less than RM40 million. This board was launched on November 11th, 1988 in order to enable small feasible companies with strong growth potential, to raised funds from stock market. The criteria for the companies to be listed on Second Board must be incorporated in Malaysia and also have a good track record for 3 years in their company performance as well their growth in profit.
PROBLEM STATEMENT
This study is performance to measure the relationship between macroeconomics variables with the stock market price for 11 years duration started from 2000 until 2010 quarterly. Macroeconomics variables include interest rate, gross domestic product and inflation rate.
Previous studies, has related that the relationship between inflation rate and stock market price is negative. It means when the rate of inflation increase, the stock market price will decrease. When the rate of inflation decrease, the stock market price will increase, inflation also will affect the prices.
The movements of stock prices tend to be sensitive due to the collapsed in Kuala Lumpur Stock Exchange in late 1997 until December 1998. Additionally, this study will reveal any evidence regarding the relationship between return and volatility since Schemert 1989 found that the stock market volatility is positively related to volatility in macroeconomics variables such as inflation, recession, and industrial production and debt levels in the corporate sectors.
Given the economic scenario which is when the fluctuated of inflation of the developing country; Malaysia and the other various factor that affect by the macroeconomic dynamics which are interest rate and gross domestic product into a stock market price.
Among the relevant crucial issues that one might ask are and carried out to identity is there are any relationship between stock market prices with interest rate, gross domestic product and inflation. What are the significant determinants of stock market price in Malaysia?
OBJECTIVE OF STUDY
The general objective of this study was to identify the macroeconomic factors that will affect stock return or affect of non-macroeconomic factor. The specific objectives of this study are as follows:
To determine whether interest rate in Malaysia significantly affect stock market prices in Malaysia.
To analyze whether the gross domestic product (GDP) significantly affect stock market price in Malaysia.
To examine whether there is a significant affect between inflation and stock market prices.
To evaluate whether there is a relationship between macroeconomic variability (interest rate, GDP and inflation) and stock market price.
To evaluate which factors are strongly has a relationship between macroeconomic variability (interest rate, GDP and inflation) and stock market price.
RESEARCH QUESTION
In order to achieve the objective of this study the researcher should can obtain answer and come up with relevant reasons for the main issue research question is "Does macroeconomic variables will affect stock market price?"
From the theoretical developed, the study has finding the result with some research questions to be ask and test the hypothesis. Research question is use as guidelines in conducting this study following the sequence. The purpose is to clarify and formulate objective or hypothesis. It is because of the theory that was found could be right and could be wrong. Thus, there will take a look at relationship between the variables which is significant or insignificant with economic theory.
In this study, there are several research questions that has been developed regarding the problem statement occurred. These research questions can be:
Is the macroeconomic factor can influence price of stock market in Malaysia?
Does the interest rate can affect to stock market price?
Does the income per capita will affect to stock market price?
Does the inflation can affect to stock market price?
SIGNIFICANCE AND SCOPE OF THE STUDY
1.7.1 SIGNIFICANCE OF THE STUDY
This study will provide information on the investment prospects with a narrow scope that is investment in stock market. This study will enhance a greater knowledge for the researcher to know how the investment activities take place.
This research provides useful information factor affecting volatility price on stock market in Malaysia that can know the relationship between both variables. This will somehow prepare the students to expect when they themselves start the industrial training or even stepping in the working world. By doing this study, the researcher can apply and have the knowledge to involve in stock market trading.
Investing in stock market has its own set of advantages and disadvantages which is related with the risk factors. The element of risk is involved; it will result in higher rate of return. There is a rule when it is higher the risk that taken by the investor, higher the return.
This research provides useful information on stock market performance to the investor such as individual, companies and any organizations, which interested to invest in Bursa Malaysia. When the return is higher the investor can earn the profit. Thus, it is important to know and investigate the factor that will affect the stock market performances.
This study also useful for the company organization that needs additional capital, it can sell the stock to rise needed funds when there is higher return from their investment.
Besides, this study also will give the information to the investor in order to help others researcher in conducting any similar research.
1.7.2 SCOPE OF THE STUDY
This study will focus on closing price of FBM Kuala Lumpur Composite Index (FBM KLCI) from the year 2000 to 2010. This study is conducted in order to examine the stock market prices. The level of under pricing will be computed for the FBM KLCI closing price on a quarterly basis.
1.8 LIMITATION OF STUDY
There are several problems that researcher has to face in completing this research. The limitations or constraints that occur are as follow:
DATA COLLECTED
This study is based on the data collected from the secondary sources for example searching information from journal, articles and interest services. In addition to the problem stated, the data may change from time to time due to volatility of prices. The data also had been affected by the unexpected risk such as tsunami aftermath, financial crisis and others.
TIME CONSTRAINT
A time constraint to finish this study has been started at the earlier semester. This has produces a difficulty in order to find an in appropriate data trustworthy, the study has to be done in 4 months. As a practical trainee, it is a constraint to me as the researcher has other commitments.
COST INVOLVED
As a student, the researcher may face thus kind of problem because there has to allocate much money in order to complete the research. Researcher must spend money for the expenditure in doing the thesis writing such as print paper, internet services and others.
DEFINITION ON TERM OF THE STUDY
Stock - Ownership of a corporation indicated by shares which represent a piece of the corporation's assets and earnings.
Stock market - Also called the equity market, the market for trading equities.
Volatility - A measure of risk based on the standard deviation of the asset return. Volatility is a variable that appears in security formulas, where it denotes the volatility of the underlying asset return from now to the expiration of the security.
Interest rate - is the rate at which interest is paid by a borrower for use of money that they borrow from a lender. An interest rate is often in percentage of the principal annually.
Inflation - a general rise in prices measured against a standard level of purchasing power. Inflation is measured by comparing two sets of goods at two sets of goods at two points in a specific time and computing the increase in cost.
Gross domestic product (GDP) - is a measurement of the value of goods services produced within a country, normally in one year. GDP does not take into account the value of goods and services generated overseas. It is sometimes also known as gross value added.
CHAPTER 2: REVIEW OF THE RELATED LITERATURE
2.0 INTRODUCTION
This chapter provides a review of several previous empirical studies on the relationship between stock market price and macroeconomic variables (interest rate, GDP and inflation relationship). In order to create comprehensive understanding of the thesis, this chapter provided theoretical background, reviewing of the literatures relating to the research question.
A few researchers had conducted studies on the stock market prices and macroeconomic variables extensively and non-macroeconomic factor. It seems that, there are researchers who agree that stock market prices have a positive or negative relationship with macroeconomic variables.
2.1 EMPIRICAL OF RELATED LITERATURE REVIEW
Stock market
According to Olowe and Rufus Ayodeji (2009) investigated the relation between stock returns and volatility of stock in Nigeria using E-GARCH-in-mean model in the light of banking reforms, insurance reform, stock market crash and the global financial crisis. Using daily returns over the period 4 January 2004 to January 9, 2009, Volatility persistence, asymmetric properties and risk return relationship are investigated for the Nigerian stock market. The result also shows that volatility is persistent and there is leverage effect supporting the work of Nelson (1991) .The study found little evidence on the relationship between stock returns and risk as measured by its own volatility. The study found positive but insignificant relationship between stock return and risk. The result shows the banking reform in July 2004 and stock market crash since April 2008 negatively impacts on stock return while insurance reform and the global financial crisis have no impact on stock return. The stock market crash of 2008 is found to have contributed to the high volatility persistence in the Nigerian stock market especially during the global financial crisis period. The stock market crash is also found to have accounted for the sudden change in variance.
Esen Erdogan and Umit Ozlale (2003) found that the effects of macroeconomic dynamics on Turkish Stock Exchange Market by using a time-varying parameter model with GARCH specification. Their methodology allows them to observe the varying effects of different macroeconomic variables on stock returns through the last decade. It is found that the financial crisis in 1994 together with unsuccessful stabilization attempts led to a structural break on the impact of macroeconomic developments on stock exchange performance.
Leong Choon Chiang and Hui Tak Kee (2009) examined the effected of macroeconomic and non-macroeconomic variables on Singapore Stock Exchange (SGX). The derived model which consisted of the significant macroeconomic variables and the unexpected non-macroeconomic variables was established. Their analyses indicated that changes in industrial production and money supply displayed positive relationships whilst exchange rates, inflation, short- and long-term interest rates showed negative relationships with Singapore hotel stock return.
Interest rate
Studies on Chen (1986 and 1991) and Ferson Harvey (1991) have documented the relationship between U.S share returns and real economic variables such as industrial production, interest rate, inflation, real GNP and money supply.
Suzanne K. Ryan & Andrew C. Worthington (2004) obtain that market risk is an important determinant of bank stock returns, along with short and medium term interest rate levels and their volatility. However, long-term interest rates and the foreign exchange rate do not appear to be significant factors in the Australian bank return generating process over the period considered.
Inflation
In terms of inflation, refer to Bruno Solnik (1983) who stated that there was a significant negative relationship between stock prices and inflation. He had taken monthly data from the U.S market from 1971 to 1980.
More recent evidence such as Mads Asprem(1988) also found similar results. They had taken to quarterly data from 1968 to 1984 retrieved from International Financial Data File of May 1986.
According to Eugene Fama (1981), there was a positive relationship between current real stock returns and expected output growth and current inflation. Fama first concluded that in an efficient market, expected output or earning growth was the primary determinant of stock returns.
According to prior empirical studies, negative correlation between inflation and stock market movement was found in several countries such as European countries, Brazil, and etc. Adrangi et al. (2000) found that stock returns in Brazil negatively correlate with inflation which supports Fama's proxy hypothesis. The facts behind this relationship in Brazil are that prospective company's profit is influenced by inflation, and that inflation causes nominal discount rate to move up which bring down future profits and stock returns.
GROSS DOMESTIC PRODUCT (GDP)
An empirical evidence made by Schmert (1988) taken from the Journal of Monetary Economics documented that a lower gross domestic product growth results in an immediate fall in stock prices, followed by higher stock return volatility in the period of low gross domestic product gross. The data is based on the U.S market.
Consistent with this study, Winger and Frasca (2000) in Personal Finance stated that changes in real gross domestic product provide measurement of the country's economic performance. Studies prove that changes in stock price and gross domestic product have a positive relationship.
