On April 1986, the FTSE Bursa Malaysia Kuala Lumpur Composite Index was launched. The main features of the FBM KLCI is these market index will be learner and more strong. The FBM KLCI consists of the 30 largest competent companies by market capitalisation instead of the current 100 stocks that have in the KLCI.
The main purpose of the FBM KLCI is to make the index easier to exact reproduction. The existing and potential investors that tracking the benchmark index will now only need to buy 30 stocks and easier to them than having to own 100 different stocks. For the smaller stocks, it can be hard illiquid. For the larger basket, more costly to maintain on the latter day.
1.1 BACKGROUND OF STUDY
Over than thirty years, the researcher was study about the relationship between macroeconomic variables and stock market index because it has been eye-catching subject for them. Although there are empirical studies that examine about these relationship, the researcher have not arrived at a harmony on the track of the causality among these variables that remained as a source of vagueness.
Establishing the narrow gap relationship between macroeconomic variables and stock market index is highly significant to the researcher and investor. The important effects of the macroeconomic variables towards market index give efficiency informational. The investor will use these information to generate abnormal profit by using past macroeconomic variables data. In addition, the government may be employed the macroeconomic variables information in helping formulating the current economic stabilization policies to generate wealth of country.
1.2 PROBLEM STATEMENT
Problem statement defines as a precise, succinct statement of the question or issue that is to be investigated. The problem in selected the macroeconomic variables to be a sample in the research because there are large number of macroeconomic variables that can be choose. The researcher selects different macroeconomic variables in their studies. Some researcher choose only one or two macroeconomic variables example Comincioli (1995) that seeks for the relationship between the stock market index and gross domestic product. The selection of relevant and suitable macroeconomic variables need much effort and it would be benefit to consider theoretical and empirical literature in this meadow of study before undertaking such a result (Humpe, Macmillan, 2007; Chen,Roll & Ross, 1986).
1.3 RESEARCH QUESTION
In this study, there are several research questions that has been developed regarding the problem statement occurred.
The main research question is there any relationship between economic variables with the market index in Malaysia.
The other question is which of these macroeconomic variables are most effected with the market index.
1.4 OBJECTIVE OF STUDY
Therefore, the objective of this paper is to determine the relationship between Malaysia market index by using FTSE Bursa Malaysia Kuala Lumpur Composite Index as a dependent variables and macroeconomic variables by using the regression function and correlation study. A set of macroeconomic variables are Gross Domestic Product (GDP), Foreign Exchange Rate(FX) and Consumer Price Index (CPI) will be using in the research.
Other objective also is to determine the macroeconomic variables that give most effect to the FBM KLCI market by examine the positive or negative relationship.
1.5 SIGNIFICANT OF THE STUDY
It is often argued that stock prices are determined by some fundamental macroeconomic variables. This implies that macroeconomic variables can influence existing and potential investors' investment decisions and motivates many researchers to investigate the relationships between market index and macroeconomic variables. From the study also will help the government to planning monetary system in enhance standard living of the country. The result from the study will increase the knowledge of academics and students about the managerial economic.
1.6 SCOPE OF STUDY
In this research, the scope of this study would cover the market index of FTSE Bursa Malaysia Kuala Lumpur Composite Index in Malaysia market and also the economic variables that are using like
The time horizon used in this study is single cross sectional where the economic variables may come from Gross Domestic Product, Foreign Exchange Rate and Consumer Price Index in monthly basis from January 1997 to December 2009.
1.7 LIMITATION OF STUDY
Lacks of data have been major problem while doing this research on collecting data on stock market index. The FBM KLCI data is not available on the Datastream and have to using Bloomberg in Bursa Malaysia library.
The researcher also facing problem on getting data on Gross Domestic Product because the data is using from year 1997 to year 2009, but there are missing on first two year data.
1.8 DEFINITION OF TERMS
1.8.1 FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI)
FBM KLCI represents the market index on KLSE.
1.8.2 Consumer Price Index (CPI)
Consumer Price Index as a measure of the aggregate price level.
1.8.3 Foreign Exchange Rate (FX)
Foreign Exchange Rate of Ringgit Malaysia against the US Dollar as a measure of the foreign exchange rate.
1.8.4 Gross Domestic Product (GDP)
Gross Domestic Product is a measure as constant prices by kind of economic activity.
1.9 SUMMARY
CHAPTER 2
LITERATURE REVIEW
INTRODUCTION
A literature review is a body of text that goal to review the critical points of current knowledge including substantive findings as well as theoretical and methodological contributions to a particular topic. This research topic is a popular because many researchers have doing the same topic but the time period, approach, market index and number of macroeconomic variables are different.
PREVIOUS STUDY
The issue on the relationship between stock market and macroeconomic variables has been argued in the finance and macroeconomic literature (Fama, 1981; Friedman, 1988; Keran, 1971; Nelson, 1976). Stock prices are influenced by financial and macroeconomic variables through a variety of market and time horizons. This is suggested by most of the study done by (Been et al., 1990; Bulmash & Trivoli, 1991; Campbell, 1987; Cochrane, 1991; Fama & French, 1989; Golsten et al., 1993; Ibrahim, 1999; Maysami & Koh, 2000; Mukherjee & Naka, 1995; Poon & Taylor, 1991).
There are a lot of study have been doing like focus on relationship between the US stock prices with real economic activity (Fama, 1981; Geske & Roll, 1983; Chen, 1986; Lee, 1992; Abdullah & Hayworth, 1993), the previous researcher also have examine the relationship between United Kingdom stock market and macroeconomic variables (Poon & Taylor, 1991; Cheng, 1995). They also research that investigate in other country like Canada, Japan, Singapore, India, Malaysia and in European country (Darrat, 1990; Hamao, 1988; Mukherjee & Naka, 1995; Maysami & Koh, 2000; Ta & Teo, 1985; Agrawalla & Tuteja, 2007; Padhan, 2007; Ibrahim, 1999; Ansotegui & Esteban, 2002; Asprem, 1989; Dritsaki & Adamopoulos, 2005; Gjerde & Saettem, 1999; Panetta, 2002; Tsoukalas, 2003; Wasserfallen, 1989).
2.2 THEORETICAL FRAMEWORK
Theoretical framework is a logically developed, described and explained network of associations among variables of interest to the research study. Three economic factors are selected to test the relationships with the market index of FBM KLCI. The factors are Gross Domestic Product, Foreign Exchange Rate of Ringgit and Consumer Price Index.
Gross Domestic Product (GDP)
Measurement methods applied such as gross domestic product or industrial production volumes to arrive at economic output of the country are highly related with financial resources (Fama, 1981; Chen, Roll, Ross, 1986; Cheung, Ng, 1998; Binswanger, 2000; Lakstutiene, 2008).
Foreign Exchange Rates (FX)
Fluctuations of exchange rate analysis can be obtained from various number of empirical (Adam, Tweneboah, 2008; Ahmad, 2008; Ibrahim, 2003; Kwon, Shin, 1999).
Consumer Price Index (CPI)
Consumer price index is most applied in arriving for the relationship between stock market and macroeconomic variables inflation (Atmadja, 2005; Dritsaki, 2005; Laopodis, 2007).
SUMMARY
CHAPTER 3
METHODOLOGY AND DATA
3.0 INTRODUCTION
Methodology may refer to nothing more than a simple set of methods or procedures, or it may refer to the basis and idealistic assumptions that be the lie behind of a particular study relative to the scientific method. Methodology applied in this research to investigate the relationship between the independent variables and dependent variables for a certain time of period by using secondary data that gather from existing resources available.
3.1 DATA COLLECTION
Data collection methods are an integral part of research design as shown in the shaded portion in the figure. There are several data collection methods, each with its own advantages and disadvantages. Problems researched with the use of appropriate methods greatly enhance the value of the research.
In this paper, the analysis is conducted by using monthly data from year 1997 to year 2009. The data used in the study may be divided into two sub groups. First data set consist of market index. Second data set consist of macroeconomic factors. The information of FTSE Bursa Malaysia Kuala Lumpur Composite Index is obtained from the Bursa Malaysia library. Three macroeconomic factors, they are Gross Domestic Product, Foreign Exchange Rate and Consumer Price Index. These series data is obtained from database retrieved from Bursa Malaysia library and BNM official website.
3.2 SAMPLING FRAME
The sampling frame is a subset of the population. In other words, some, but not all elements of the population would form the sample. The population in this study is Malaysia market index and FBM KLCI as sample from the population.
In this paper, we use non - probability sampling. The data used in the study is FTSE Bursa Malaysia Kuala Lumpur Composite Index act as a dependent variable. The data are monthly and extend from January of 1997 to the December of 2009. For the independent variables, the data is using Gross Domestic Product, Foreign Exchange and Consumer Price Index. The time of period that are use also same with the dependent variable.
3.3 SOURCES OF DATA
Data can be obtained from primary or secondary sources. In this study, the secondary sources are using. Secondary data refer to information gathered from sources already existing. FTSE Bursa Malaysia Kuala Lumpur Composite Index represents the dependent variable and Gross Domestic Product, Foreign Exchange Rate and Consumer Price Index as a independent variables in the research. The data are monthly for the period from January 1997 to December 2009.
3.4 VARIABLES AND MEASUREMENT
The variables used in this study can be categorized into two main types which are; the dependent that variable of primary interest to the researcher and the independent variables that influences the dependent variable in either a positive or negative way.
3.4.1 Dependent Variables
The dependent variable for this study is FTSE Bursa Malaysia Kuala Lumpur Composite Index.
3.4.2 Independent Variables
For this study, there are three independent variables that will be measured. There is the Gross Domestic Product, Foreign Exchange Rate and Consumer Price Index.
RESEARCH DESIGN
The research design, which involves a series of rational decision - making choices. This research is designed to explore the relationship between dependent and independent variables. In this study, it engages in hypotheses testing that will explain the certain significant correlations between economic variables.
3.5.1 Purpose of the Study
By using the hypothesis testing, purpose of this study is to determine the relationships between FTSE Bursa Malaysia Kuala Lumpur Composite Index with Gross Domestic Product, Foreign Exchange Rate and Consumer Price Index.
3.5.2 Types of Investigation
This study involved the correlational study of investigation through certain types of regression.
3.5.3 Unit of Analysis
In this study, the point of Gross Domestic Product, Foreign Exchange Rate and Consumer Price Index were using as a variables.
3.5.4 Time Horizon
This study will use monthly basis data from year 1997-2009 for 12 years.
THEORETICAL FRAMEWORK
There is a classical theory that explained there have relationship between the economic factors and the market index in any activity.
Dependent variable: FTSE Bursa Malaysia Kuala Lumpur Composite Index.
Independent variables: Gross Domestic Product, Foreign Exchange Rate and Consumer Price Index.
Figure 1: Schematic Diagram (Relationship Diagram)
Gross Domestic Product
Independent Dependent
Foreign Exchange Rate
FBM KLCI
Consumer Price Index
According to the schematic diagram above, it can be elaborated that the FTSE Bursa Malaysia Kuala Lumpur Composite Index are determine by the: Gross Domestic Product, Foreign Exchange Rate and Consumer Price Index.
3.7 DATA ANALYSIS AND TREATMENT
The statistical tools use in the study is Multiple Linear Regression Model. This model of analysis is done to examine the simultaneous effects of several independent variables on a dependent variable that is interval scaled. In other used since is can explain the correlation between the dependent and Gross Domestic Product, Foreign Exchange Rate and Consumer Price Index.
Multiple Linear Regression Model:
Y = α + ß1χ1 + ß2χ2 + ß3χ3 + ε
(Equation 1)
Where;
Y = Dependent variable which represent Volume of IPO
= The constant number of equation
= Coefficient Beta value
= Independent variable which represent Gross Domestic Product
= Independent variable which represent Foreign Exchange Rate
= Independent variable which represent Consumer Price Index
= Error
3.8 HYPOTHESIS STATEMENT
A hypothesis can be defined as a logically conjectured relationship between two or more variables expressed in the form of a testable statement.
To test whether this is applicable to the Malaysia market index, it is hypothesized that:
Hypothesis 1
H0: Macroeconomic variables have relationship with market index.
SUMMARY
