Modeling the Relationship Between Malaysia Exchange Rate and Sectoral Stock Market Indices
This study investigates the relationship between MYR/USD exchange rate and 10 sectoral stock markets indices after the pegging period which is starting from August 2005 to -December 2015. The Vector Auto Regressive or Vector Error Correction Model (VAR/VECM) framework is used in this study, nonetheless unit root tests (ADF and KPSS) as well as cointegration test will be implemented before using VAR/VECM framework. Since, there are long-run relationship between the significant sectoral markets which have been chosen from regression analysis, VECM is employed. Meanwhile, the results from Granger causality test indicates that there exists positive unidirectional from exchange rate to consumer product, finance and industrial product respectively. In short, high exchange rate has affected these three sectoral stock markets over the period under study. However, in long-term forecast, the variance decomposition results have shown that the impact of exchange rate on each sectoral stock price is ranging from 1.87-15.74%.
