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Abstract This paper attempts to examine the relationship between Kuala Lumpur Composite Index (KLCI) and selected macroeconomic variables namely industrial production, lending rate, money supply, inflation, exchange rate and financial crisis from December 1993 until December 2010. The methodology used in this study is multiple regression analysis based on Ordinary Least Square (OLS) method. The result indicates that industrial production, lending rate, money supply, exchange rate and financial crisis seem to significantly affect the KLCI, whereas inflation does not have significance effect. We suggest the significant variables to be considered as the policy instruments by the government in order to stabilize stock price. Introduction Kuala Lumpur Composite Index (KLCI) is the main index in Kuala Lumpur Stock Exchange (KLSE). It comprises of the largest 30 companies by full market capitalization on KLSE¶s Main Board. Market capitalization is essentially stock price multiply by shares outstanding. Like any other stock indexes, KLCI is used to monitor the behavior of a group of stocks. As the result, KLCI would provide an accurate performance indicator of the Malaysian stock market as well as the country¶s economy. According to stock valuation model, stock price represent the discounted present value of future cash flows for the investors. This means any change in macroeconomic variables could affect the cash flows and consequently the stock price. The importance of studies in Malaysian stock market has become increasingly important. This is due to several reasons. First, Malaysian Stock Market is one of the most prominent emerging markets in the region. It is currently number 8 biggest stock market in Asia in terms of

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Regression Analysis of Kuala Lumpur Composite Index

market capitalization. Second, nowadays most of the member of society has important stake on the stock market. We can divide those people into two groups. The first group is those people who are directly affected by changes in stock market. This group include individual who invest their money is stock market by purchasing stocks. It is reported that currently 18% of Malaysia¶s population invest in stock market. The second group is those people who are indirectly affected by changes in stock market. The individual in this group does not invest in stock market, however they have their money in institutions that invest in stock market. Therefore the success or loss in investment of those institutions will affect the well being of many people. Examples of such institutions are pension funds, insurance companies and sovereign funds. In Malaysia there are two institutions which organize pension funds, Employee Provident Fund (EPS) and Kumpulan Wang Persaraan (KWAP). Currently KWAP is fourth biggest owner of stock in KLSE. Khazanah Nasional is the organizer of sovereign funds in Malaysia. It is reported in KLSE website that 33.58% of all stock in Malaysia is owned by such institutions. Third, study on stock market relationship with macroeconomic variables will give government some idea which variable should be considered as the policy instruments by the government in order to stabilize stock prices. The objective of this study itself is to to determine and examine the relationship between the macroeconomic variables and its degree of influence over the stock market index (KLCI). in addition, we would like to test and to conclude on the assumptions and perceptions of these variables. Literature Review

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Regression Analysis of Kuala Lumpur Composite Index

Stock prices reflect expectations of the future performances of corporate and profits. Therefore, if there are any changes in macroeconomic variables that could affect corporate profits and performances, it would affect the stock market as well. As a result, stock prices could be used as an indicator for the economic activities. Due to the relationship between stock prices and macroeconomic variables, Maysami, Howe and Hamzah (2004) suggested that there are several macroeconomic variables that can be used to construct the nation¶s policies for stabilizing stock market. They propose that short and long-term interest rates, industrial production, price levels, exchange rate and money supply would be appropriate variables. While before the studies mainly focused on developed countries¶ stock market, there is a rising trend of studies that extend the analysis to the case of developing countries. For the case of Malaysia, Ibrahim and Yusoff (2001) make analysis between the stock prices (KLCI) and macroeconomic variables such as industrial production (IP), money supply (M2), price level as a measure of consumer price index (CPI) and exchange rate. KLCI is positively related to CPI and negatively related to M2. The positive association between KLCI and CPI seems to support the view that the stock prices in Malaysia are a good hedge against inflation. In Abdul Madjid and Yusof (2009) study, they found out that macroeconomic variables such as industrial production index (IP), money supply M3, real effective exchange rate (REER), interest rate (treasury bill rate (TBR)) and federal fund rates (FFR) are significant explanatory factors of Islamic stock market returns in Malaysia. Their approach is based on Autoregressive Distributed Lag model (ARDL). In another study, Ibrahim and Aziz (2003) analyze the linkage between stock prices and four macroeconomic variables. They discover that there is a positive short-run and long-run

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money supply. Law and Dayang-Afizzah (2006) in their study by using Granger non-causality found that Malaysian stock prices are led by the exchange rate during the crisis period. GDP. Lee. Ahmed (2008) in his study by using Johansen`s approach of cointegration. stock prices have negative association with money supply and the exchange rate. consumer price index. the Malaysian Ringgit depreciated against US dollar and it significantly influences the Malaysian stock prices. foreign direct investment. M2. During the crisis period.Regression Analysis of Kuala Lumpur Composite Index relationship between stocks prices with CPI while. inflation rate. They found that there is relationship between stock prices and macroeconomic variables in New 4 . and Tafri (2009) explore the interactions between selected macroeconomic variables and stock prices for the case of Malaysia in a vector autoregressive (VAR) framework. exports. exchange rate. Mohd Sidek. Habibullah. total saving deposit unemployment rate and lending rate. revealed that there is links between aggregate macroeconomic variables and stock indices of India in the longrun. interest rate. Cheng. The variables that used are long-run and short-run interest rate. exchange rate. They show that changes in Malaysian stock market index do have correlation with changes in money supply. NSE Nifty and BSE Sensex in India Azman-Saini. exchange rate. Yong and Zhang (2006) investigate the relationship between stock prices and macroeconomic variables for New Zealand. The variables are index of industrial production. Lo and Ma (1990) in their study by using multiple regression analysis found that there are correlations between Hong Kong¶s Hang Seng Index with trade balance. reserves and industrial production index. total money supply. Gan. money supply and domestic retail oil price. interest rate. Abdul Rahman.

but a positive relationship between the same variables over the long-run. and Thailand in Al-Khazali and Pyun (2004). so when interest rate is high as compare to other countries. Indonesia. South Korea. trade balance and money supply with stock prices. another study based on Korea stock prices by Kwon and Shin (1999) indicates that there is relationship between exchange rates. Meanwhile. when the interest rate is low they might prefer to invest into other markets. investors would like to keep their money in banks rather than involving in risky investment. They conclude that the stock prices in Asia are actually a good hedge against inflation in the long-run. they found that stock prices are influenced positively by industrial production and short term interest rates but it is negatively influenced by the money supply. Singapore. Maghyereh (2002) examines the long-run relationship between the 5 . The positive relationship between stock prices and inflation is also seen in the Pacific Basin Countries such as Australia. Hong Kong.Regression Analysis of Kuala Lumpur Composite Index Zealand. They found the data for US are suggest stock prices are positively related to industrial production and negatively related to both the consumer price index and long term interest rate. However for Japanese data. Malaysia. on the other hand. This paper finds the negative relationships in the short-run. The impact of inflation rate and M2 on stock prices is found to be negative. Humpe and Macmillan (2007) study the influence of several macroeconomic variables on stock prices in US and Japan using single cointegration vector. Their explanation for negative relationship between stock price and M2 is because money supply in New Zealand is influences by foreign investors. Similarly. They also find an insignificant positive relationship between US stock prices and the money supply. Japan. Philippines.

The results indicate that macroeconomic variables are reflected in stock prices in the Jordanian market. trade balance. and industrial production with Singapore stock markets using the vector error correction model which covered the period from 1988 to 1995. foreign exchange. Netherlands. interest rates. Their paper consists with quarterly data during 1962 to 1995. long and short term interest rates. Tsoukalas (2003) observes the relationships between stock prices and macroeconomic factors like exchange rate. money supply. They found that all the macroeconomic variables have significant relations with the changes in Singapore¶s stock market levels. Nasseh and Strauss (2000) investigate the relationship between stock prices and domestic and international macroeconomic variables in six countries in European continent. and the U. France Germany. inflation. oil price.Regression Analysis of Kuala Lumpur Composite Index Jordanian stock prices and selected macroeconomic variables.K. However. by using a cointegration approach. by using Johansen¶s cointegration analysis with the monthly data from 1987 to 2000. They also find the negative influence of interest rates on stock prices. money supply and CPI from the year 1975 to 1998 by using vector autoregressive model (VAR) in the Cyprus equity market. and money supply. According to him. Italy. because of higher demand for services like tourism and off-shore banking. They find that Industrial Production Indies (IP) and Business Surveys of Manufacturing Order (BSM) can explain movement of stock prices in long-run. industrial production. Maysami and Koh (2000) examine the dynamic relations between macroeconomic variables such as exchange rate. Switzerland. short-run interest rate is positively influenced stock prices. it 6 . The variables are industrial production. inflation. The results indicate a good relationship between stock prices and those mentioned macroeconomic factors. domestic exports.

The level of economic activity in the country would affect corporate profitability. we suggest a positive relationship between IP and stock price. Ahmed (2008). Industrial Production (IP) IP KLCI IP is typically used as a proxy of real economic activity. k = rRF + (rM . The opposite effect will be true during recession. the change in risk free rate would be transmitted to discount rate (required rate of return). Therefore increase in IP would indicate economic growth. Ibrahim and Yusoff (2001). rRF= risk free rate. Howe and Hamzah. For instance during economic grow which is indicated by increase in IP. Lending Rate (LR) LR KLCI Change in lending rate will directly affected nominal risk free rate.rRF)b where k= required rate of return in stock. 7 . Abdul Madjid and Yusof (2009) and Maghyereh (2002). This assumption is consistent with assumption mentioned in Maysami. rM= market return and b= beta coefficient of the company. Through CAPM model. we hypothesize certain relationship between KLCI and each independent variable. there will be rise in output and therefore increase in expected future cash flows which would raise the stock price. (2004). Hence. Hypotheses Relationship between Variables and KLCI Based on financial theory and results of literature review. Humpe and Macmillan (2007).Regression Analysis of Kuala Lumpur Composite Index is not surprising to see the strong relationship between stock prices and exchange rate in Cyprus economy.

First interest rates can influence the level of corporate profits which in turn influence the price that investors are willing to pay for the stock through expectations of higher future dividends payment. (2004) there are two more rationale of negative relationship between lending rate and stock price. Most companies finance their capital equipments and inventories through borrowings. Nasseh and Strauss (2000). Yong and Zhang (2006). A reduction in interest rates reduces the costs of borrowing and thus serves as an incentive for expansion. D1= dividends after first period. Gan. Second. This will have a positive effect on future expected returns for the firm. This is based on Gordon¶s Growth Stock Valuation equation. Mohd Sidek. Based on the overwhelming similarity in previous academic literatures. which would increase discount rate (required return). For instance. Maysami and Koh (2000). increase in lending rate will subsequently increase nominal risk free rate. According to Maysami. Increase in discount rate will decrease price of the stock. Howe and Hamzah. 8 . hence an increase in interest rates would make stock transactions more costly. as substantial amount of stocks are purchased with borrowed money. This will reduce demand and lead to a price depreciation. Similar hypotheses are mentioned in Ahmed (2008). Maghyereh (2002). Investors will require a higher rate of return before investing. g= constant growth rate of the dividends and k= required rate of return on the stock. and Tafri (2009) and Tsoukalas (2003). Humpe and Macmillan (2007).Regression Analysis of Kuala Lumpur Composite Index The change in discount rate would automatically cause change in stock price. Lee. Abdul Rahman. we suggest a negative relationship between lending rate and stock price. P=D1/(k-g) where P= stock price. ceteris paribus.

Maysami and Koh (2000). This hypothesis is supported by Maysami. For an export dominated country.Regression Analysis of Kuala Lumpur Composite Index Money Supply (M2) M2 KLCI Money supply is used monetary policy tool by the central bank. Abdul Rahman. if the demand for these good is elastic. Howe and Hamzah (2004). Therefore we suggest that money supply has positive relationship with KLCI Exchange Rate (ER) ER KLCI Malaysia is an export dominated country. Maghyereh (2002). An increase in the money supply may lead to an increase in the discount rate and lower stock prices. As a result. As the Malaysian Ringgit depreciates against foreign currencies. profits and the stock prices of the 9 . Ahmed (2008). and Tafri (2009). this negative effect may be countered by the economic stimulus provided by money growth. it means that central bank pursue expansionary monetary policy which would stimulate the economy. the volume of exports from the country increases. When central bank increase money supply. One of the expected results is corporate earnings would increase. This would likely result in an increase in future cash flows and stock prices. products exported from Malaysia become cheaper in the world market. Mohd Sidek. Humpe and Macmillan (2007). According to Abdul Madjid and Yusof (2009). which in turn causes higher cash flows. the effect of money supply on stock prices. Maysami and Koh (2000). further support this hypothesis. can be negative. currency depreciation will have a favorable impact on a domestic stock market. This is due to positive correlation between money supply and the rate of inflation. who found a positive relationship between money supply and stock returns in Singapore. However. however.

Maghyereh (2002). Consumer Price Index (CPI) CPI KLCI The effect of increase in inflation to KLCI is similar with increase in lending rate. Gan.Regression Analysis of Kuala Lumpur Composite Index domestic companies. Since cash flows do not rise at the same rate as inflation (Maysami. Ibrahim and Yusoff (2001). 2004). Humpe and Macmillan (2007). Hence. However. Maysami and Koh (2000). Lee. the rise in discount rate leads to lower stock prices. Therefore. Gan. Abdul Madjid and Yusof (2009). Ahmed (2008). This suggestion is mentioned in many studies such as Maysami. Maysami and Koh (2000). For this reason. The terrible economic performance is combined with crowd behavior who will sell their shares in order to avoid a higher financial loss due to the decrease in stock price. Ibrahim and Aziz (2003) and Maghyereh (2002). we expect negative relationship between financial crisis and KLCI. we assume that exchange rate and KLCI has negative relationship. Lee. The opposite should happen when the currency of the country appreciates against foreign currencies. we expect the that inflation and KLCI has negative relationship. there will be dramatic decline in stock price when financial crisis occurs. 10 . Howe and Hamzah. Yong and Zhang (2006). Financial Crisis (FC) FC KLCI Financial crisis is driven by economic decline and panic. (2004). Inflation increases the nominal risk-free rate and raises the discount rate in the valuation model. Yong and Zhang (2006). This hypotheses is consistent with Ahmed (2008). Therefore. Howe and Hamzah. this crowd behavior who tries to sell their shares caused the price to decline even more.

Lastly. The exchange rate represented by employing the official rate at the end of the month for Ringgit per USD. We derived from Hasan (1999) and Mahani & Rajah (2009) the period in which financial crisis occurs. KLCI is used because it is the main index in KLSE. Nevertheless. we analyze the regression of KLCI and selected independent variables which are industrial production. exchange rate. We select lending rate as proxy for interest rates because up to 2004. therefore we use lending rate. in 2004 lending rate was replaced by overnight rate. lending rate. Multiple linear regression analysis is used to study the correlation between the KLCI and the identified macroeconomic factors. we use CPI as proxy to inflation. inflation and financial crisis as dummy variable. Our analysis covers 17 years period using monthly data (M12 1993 ± M12 2010). For inflation. For real economic activity. M2 is used as money supply variable and is expressed in Ringgit. The selection of monthly data is intended to better capture the volatility nature of stock market. the value would be 0. money supply. we use industrial production index as the proxy. Multiple linear regressions are a method used to model the 11 . For lending rate we use average lending rate to proxy interest rates. The data on KLCI are collected from Yahoo Finance. If financial crisis occurs in a specific month. the value would be 1 and if financial crisis does not occurs in that month. we use financial crisis as dummy variable. All of the independent variables data are obtained from the IMF¶s International Financial Statistic Database (IFS). Bank Negara Malaysia used lending rate as the benchmark for interest rates in the country. For KLCI we use end of month values of KLCI index. However because our analysis cover more period before 2004 (11 years) compare to after 2004 (6 years).Regression Analysis of Kuala Lumpur Composite Index Methodology For this study.

Software package Minitab is utilized to develop the equation. Lo and Ma (1990) study. Nevertheless. It is based on ordinary least squares (OLS) method. In developing the model. The significance of a time lag is determined by its level of correlation with KLCI. we came out with the second model where we replaced several independent variables from Model 1 with 12 . CPI and Industrial Production affected KLCI after some periods.Regression Analysis of Kuala Lumpur Composite Index linear relationship between a dependent variable and one or more independent variables. first we used our educated guesses. The most significant time lags are subsequently used in our multiple regression models. Since the effect of time lags of the variables on KLCI is unknown. All regression coefficients will be evaluated individually through individual test to ensure only significant independent variables will be represented in the final equation. we need to include time lag of each variables in the equation. Lending Rate. Multiple Regressions is a way to describe the relationship between a dependent variable and several independent variables. Model Estimation In this part. Due to the fact that some variable such as M2. Therefore after we have done extensive literature review. the higher being the more significant. we present the result of data analysis by using Multiple Regression Analysis. Therefore we can identify the most significant time lag having the most significant effect on KLCI for each independent variable by using simple regression models. This method was implemented in Cheng. the KLCI at period t is correlated with each independent variable from periods t-8 to t+2. This approach basically based on Ordinary Least Square (OLS) method. we found out that the result is unsatisfactory.

Firstly.0007654 -1.868 53. Afterwards.7 -0. employ KLCI as dependent variable with Lending Rate (LR). GDP.1. The model is: KLCI = + 1 CPI + 2 GDP + 3 M2 + 4 LR We have to consider four outputs which indicate whether the model is fit or not.4 -27.527 R-Sq = 46.81 0. and CPI.5 0.006038 0. and CPI.935 VIF 16.0004775 1.09 0.6 18.54 P 0 0 0. GDP.5% R-Sq(adj) = 43. and Consumer Price Index (CPI) as independent variables.000765 M2 . Gross Domestic Product (GDP). We therefore do three steps until obtaining the best one as follows. we apply Stepwise Regression Procedure through backward selection to come out with the third model.00604 GDP + 0.428 2.1 CPI + 0. Money Supply (M2). the Adjusted R square which depicts the proportion of variation in KLCI explained by LR. Table 1 shows us that the Adjusted R square is 43. M2. M2.27.7% whereby too less to explain the relationship between KLCI and LR. Model 1 The first step. Table 1 Regression Analysis SE Coef T 512.69 -4.5 LR S = 199.882 The regression equation is: KLCI = 2459 .7% 13 .1 4.08 Predictor Constant CPI GDP M2 LR Coef 2459.8 6. We use quarterly data from Q1 1991 up to Q4 2010 and we do not use time lag in the equation.074 0.113 0.003337 1.805 36.Regression Analysis of Kuala Lumpur Composite Index more significant independent variables suggested in the literature reviews.

794 0. 4 and 75 degrees of freedom. Table 2 Correlation Matrix KLCI LR M2 GDP LR -0.574 -0. we can conclude that there is multicollinearity problem in this model. According to correlation matrix below. we can reject Ho which means at least one of the independent variables does not equal to zero.778 GDP 0. we can see that F test statistic is 16.431 M2 0.473 -0. we employ F-testing procedure to see the significance of independent variables to dependent variable.Regression Analysis of Kuala Lumpur Composite Index Source Regression Residual Error Total DF 4 75 79 Analysis of Variance SS MS 2597723 649431 2985813 39811 5583536 F 16. If F > critical value.969 14 .588 -0. It means that there are high correlations among independent variables.31.53 from the F distribution table. we can reject Ho which gives conclusion that at least one of the independent variables does not equal to zero. we can see that the value of each correlation between independent variables is higher than 0.986 CPI 0.31 P 0 Secondly.7 in absolute values. Thirdly is Correlation Matrix which shows the multicollinearity between independent variables. Based on Table 1.958 0.802 0. Hence. we can get critical value namely 2. Hence. By 5% level of significance.

Model 2 After extensive literature review. there is serious multicollinearity problem in the model. and Financial Crisis (FC) as dummy variable. We conclude that the most significant time lag for each variables 15 . Money Supply (M2).00. M2. we attempts to regress between KLCI against Industrial Production (IP). We use monthly data from M12 1993 up to M12 2010 to better reflect the volatile nature of the stock markets. Fourthly is Individual Significant Test. we use the effect of time lag in the equation. Therefore. GDP. If t > critical value. we come out with the second model. We apply t-Test approach. we can continue to examine whether there is a linear relationship between each of the independent variables and KLCI as dependent variable. From Table 1 we can see that three out of four variables has VIF higher than 10. According to Table 1. and LR have t-statistic lower than critical value which is 2. we can reject Ho which means the specific independent variable does not have significant relationship with KLCI. we can conclude that there is multicollinearity problem in the model.00. we get critical value of t at 5% level of significance and 75 degree of freedom which is 2. From t-distribution table.Regression Analysis of Kuala Lumpur Composite Index We could also detect multicollinearity from Variance inflation factor (VIF). We come out with these independent variables based on previous literatures. Exchange Rate (ER). Lending Rate (LR). The rule of thumbs regarding VIF is the value is higher than 10. The time lag used for each independent variables are based on the most significant time lag method explained under methodology. In the second model. In addition. Therefore we conclude that these variables do not have significant effect on KLCI at 5% level of significance. Consumer Price Index (CPI).

911 The regression equation is KLCI = 2125 + 6.0001967 3.55 -6. Table 3 Regression Analysis Coef SE Coef T 2125.469 3.45 14.26%.056 6.44 -152 23.1 329.83 IP + 14.000719 M2 .04 0.865 62.74 6.163 8.0007189 0.47 0.372 3.83 1.152 FC S = 99.936 47. It reflects that Adjusted R square is better than Model 1.868 5.07 -8.2% Source Regression Residual Error Total DF 6 190 196 Analysis of Variance SS MS 11205651 1867608 1873799 13079449 9862 F 189.37 P 0 16 . Therefore our model become KLCI = + 1 IPt-3 + 2 LRt-8 + 3 M2t-8 + 4 CPIt-8 + 5 ER + 6 FC From the table 3 below. while FC and ER have no time lag.7% R-Sq(adj) = 85.8.9 6.387 ER .025 2. LR at t-8.099 -1.Regression Analysis of Kuala Lumpur Composite Index are IP at t-3. M2 at t-8 and CPI at t-8.515 7.65 -386.87 CPI .51 -13.084 0 0 0 VIF 1.5 LR + 0.56 Predictor Constant FC LR CPI IP M2 ER P 0 0 0.3081 R-Sq = 85. we get an increase in Adjusted R square which become 85.77 28.

972. Hence.192 CPI 0.154 0. there are six correlations between independent variables which exceed 0.374 -0.Regression Analysis of Kuala Lumpur Composite Index Secondly. 6 and 190 degrees of freedom.156 0.37. we can get critical value namely 2.131 0. Fourthly is Individual Significant Test. According to Table 3. Hence. we can conclude that there is multicollinearity problem in model 2.443 -0. we can see that F test statistic is 189.097 0.7 in absolute values.18 from the F distribution table. The critical value of t at 5% level of significance and 190 degree of freedom is 1.882 -0.588 0. we can conclude that these variables have significant effect on KLCI at 5% level of significance.407 LR -0. we can see from Table 3 that there are two variables which has VIF higher than 10. Therefore. all independent variables except CPI have t-statistic greater than critical value. Table 4 Correlation Matrix KLCI IP LR M2 ER CPI IP 0. we have to drop CPI because this variable does not have significant effect on KLCI at 5% level of significance. By 5% level of significance.389 0.081 According to correlation matrix below. we can reject Ho where give conclusion that that at least one of the independent variables does not equal to zero.543 0.921 -0. based on Table 3.166 0. Based on VIF. 17 .964 0. Hence. we can conclude that there is still multicollinearity problem in this model.71 ER -0.084 0. Therefore.749 0.392 FC -0.802 M2 0. It means that there are high correlations among independent variables.

which is.54 17.26 P 0 18 . This change makes our model become KLCI = + 1 IPt-3 + 2 LRt-8 + 3 M2t-8 + 4 ER + 5 FC We expect that this factor can give higher Adjusted R square which indicates better model.562 6.24 17.247 3.4 100. we drop CPI because this variable does not have significant effect on KLCI at 5% level of significance.06 21.57 6.136 FC S = 99.1% Source Regression Residual Error Total Total DF 5 191 196 196 Analysis of Variance SS MS 11175823 2235165 1903626 13079449 13079449 9967 F 224.1%.625 8.1 %.6 LR + 0.467 1.81 -6.22 0.587 5. 85. However the decrease in Adjusted R square is insignificant. which is 0.4% R-Sq(adj) = 85.011 0 0 0 VIF 1. we get lower Adjusted R square than the second model.000396 M2 .07 -426. According to Table 5.8330 R-Sq = 85.12 -24.91 Predictor Constant FC LR IP M2 ER P 0 0 0.839 2.68 -136.396 The regression equation is KLCI = 1578 + 6.04 6.427 ER .7 15.Regression Analysis of Kuala Lumpur Composite Index Model 3 In this step.0006517 6.144 1.47 IP + 17. Table 5 Regression Analysis Coef SE Coef T 1578.00039587 0.

Regression Analysis of Kuala Lumpur Composite Index Table 6 Correlation Matrix IP LR M2 ER FC KLCI IP LR M2 ER 0. From table 5. we employ F-testing procedure to see if any of the independent variables do have the ability to explain the variation in independent variables. according to Gujarati (2004) and Lind. there is still multicollinearity problem in our model. Marchal. we can see that based on correlation matrix. Therefore we would like to conclude that in Model 3 there is no serious multicollinearity problem.156 0.131 0. We select level of significance to be 5%.71 -0. However.154 0. we can see that there is no VIF which exceeds 10. By 5% level of significance. we can reject Ho which means at least one of the independent variables¶ coefficient does not equal to zero. we would like to reject Ho because if Ho is rejected it means that at least one of the coefficient of independent variables do have significance.374 -0. To rule of thumbs for the decision in F testing is if F > critical value.588 0.543 0.Therefore the alternate hypotheses is H1: 1 2 3 4 5 60. & Wathen (2010) VIF is a better measurement of multicollinearity compare to correlation matrix. 5 and 191 degrees of 19 .192 -0.882 -0. It means based on correlation matrix.084 In this model.097 0. Based on the hypotheses.802 0.7 in absolute value.443 -0.166 0.407 -0. there are three correlations among independent variable exceed 0. Global Test To do the global test. The null hypothesis is Ho: 1= 2= 3= 4= 5= 6=0.

all independent variables have t-statistic greater than critical value.66 from the F distribution table. we can conclude that these variables have significant effect on KLCI at 5% level of significance. we test each independent variable independently to determine whether each variable has significant relationship with dependent variables based on t distribution. we can reject Ho which gives conclusion that at least one of the independent variables¶ coefficient does not equal to zero.26.972. we can see that F test statistic is 224.Regression Analysis of Kuala Lumpur Composite Index freedom. Based on Table 5 above. The critical value from t distribution table is 1. We will test the hypotheses at 5% level of significance and 191 degree of freedom. In individual test. Similar like global test we would like to reject Ho because Ho states that the coefficient of an independent variable is equal to zero which means it has no significant relationship with KLCI. Individual Test Last of all is Individual Significant Test. Therefore. Because the hypotheses have equal sign therefore it is two tailed. Hence. According to Table 5. we can get critical value namely 2. 20 .

6 LRt-8 + 0.Regression Analysis of Kuala Lumpur Composite Index We could also see from the p value of each independent variable to see whether those independent variables have significant relationship with KLCI. The rule of thumb for p value is when p value is lower than level of significance.000396 M2t-8 .427 ER -136 FC 21 . Therefore. we can summarize our model as: KLCI = 1578 + 6. we can conclude that all of the independent variables have significant relationship with KLCI. we reject Ho.05.47 IPt-3 + 17. From table 5 we can observe that all of the independent variables has p value that is lower than 0. Interpretation of Coefficient According to Table 5.

54. 4 indicates negative relationship between 22 . = 0. Positive sign of = 17.54 Holding other variables constant. one Ringgit appreciation against US Dollar will lead to decrease in KLCI by 426.6 1 indicates positive relationship between IP and KLCI 2 Holding other variables constant.47 after 3 months.00039587 after 8 months. 1 unit increase in IP will lead to increase in KLCI by 6. Positive sign of Lending Rate (LR) and KLCI. one percent increase in Lending Rate (LR) will lead to increase in KLCI by 17. 4= 2 indicates positive relationship between -426.Regression Analysis of Kuala Lumpur Composite Index This model involves intercept ( ) and slope ( i). Negative sign of Exchange Rate (ER) and KLCI.47 1 Holding other variables constant. Positive sign of Lending Rate (M2) and KLCI.6 after 8 months. We thus can interpret coefficients above as: = 1578 This means that we estimate KLCI would be 1578 when all independent variables equal to zero = 6.00039587 2 indicates positive relationship between 3 Holding other variables constant. one million Ringgit increase in M2 will lead to increase in KLCI by 0.

of course. Their rationale is Central Bank used interest rates for growth stimulus. It means that 85.1% of the variation in KLCI can be explained by macroeconomic factors in the model. The findings indicate that these variables have significant relationship with KLCI. Therefore. The expected relationships between independent variables and dependent variable stated earlier are correct except for Lending Rate.06 Holding other variables held constant. when financial crisis occur KLCI will be less by 136.06. The best model generates 85. Negative sign of Conclusion This paper studies the effects of macroeconomic variables namely: industrial production. It remains true. 23 . This positive relationship between lending rate and stock index is also encountered in Humpe and Macmillan (2007) paper regarding correlation between stock market movements and macroeconomic variable in Japan. lending rate. exchange and financial crisis on KLCI. when Bank Negara Malaysia increases money supply in the country. Rather than has negative relationship with KLCI.1% Adjusted R2. money supply. that the applicability of the multiple regression technique to forecast stock price index accurately is limited.Regression Analysis of Kuala Lumpur Composite Index 5 = -136. KLCI is expected to increase after some time. 5 indicates negative relationship between Financial Crisis and KLCI. Lending Rate has positive relationship with KLCI. However it could provide a general guideline of stock index¶s movement. For instance. the positive coefficient can be explained by counter-cyclical central bank responses to economic fluctuations.

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58 1129.85 10.62 1000.18 83.189.30 71.472.10 1077.511.21 10.28 643.994.00 73.152.72 1011.41 86.00 39.95 90.93 9.854.06 90.00 305.50 100.80 88.081.472.13 9.665.45 812.00 296.092.00 209.00 71.34 69.00 270.39 75.00 71.138.00 281.17 1149.00 70.202.00 65.709.00 122.481.00 35.30 9.00 164.44 719.31 78.00 117.57 594.00 292.345.00 222.00 39.52 586.00 154.10 9.21 8.00 58.17 83.52 80.480.74 8.00 64.774.00 104.13 502.00 53.00 57.56 10.00 110.676.00 160.274.00 249.00 78.08 7.15 10.697.00 36.595.779.10 12.00 70.00 67.348.42 70.00 337.366.76 971.00 51.00 35.18 76.00 40.294.63 71.250.080.00 67.22 593.976.00 51.00 46.Regression Analysis of Kuala Lumpur Composite Index Appendix Data Set Model 1 CPI PENINSULAR MALAYSIA DESCRIPTOR Index Number National Currency Millions Ringgit Index Number Index Number GROSS DOMESTIC PRODUCT AVERAGE LENDING RATE M2 KLCI Q1 1991 Q2 1991 Q3 1991 Q4 1991 Q1 1992 Q2 1992 Q3 1992 Q4 1992 Q1 1993 Q2 1993 Q3 1993 Q4 1993 Q1 1994 Q2 1994 Q3 1994 Q4 1994 Q1 1995 Q2 1995 Q3 1995 Q4 1995 Q1 1996 Q2 1996 Q3 1996 Q4 1996 Q1 1997 Q2 1997 Q3 1997 Q4 1997 Q1 1998 Q2 1998 Q3 1998 Q4 1998 Q1 1999 Q2 1999 Q3 1999 Q4 1999 66.91 10.00 42.84 79.879.57 9.52 10.00 54.05 618.00 260.46 13.157.540.835.33 602.33 28 .00 114.17 853.82 9.737.315.552.00 9.271.88 78.00 214.00 128.892.114.30 10.00 288.27 90.05 83.83 1275.62 87.77 72.30 9.00 238.217.674.862.00 67.35 8.74 11.734.25 721.777.873.96 77.78 68.00 139.60 995.65 8.00 198.00 44.50 73.30 814.77 31.22 10.218.01 9.08 1136.103.55 67.94 88.70 522.80 9.896.522.34 90.84 587.077.790.00 286.497.00 317.82 811.14 10.96 1203.68 82.311.55 84.49 81.457.604.17 10.800.628.00 45.35 8.00 185.52 76.00 77.00 61.687.16 9.40 91.576.006.27 10.209.605.373.29 88.154.10 675.00 36.21 592.59 8.44 73.54 8.21 984.69 9.32 952.52 455.00 31.31 1135.413.00 88.27 1237.00 81.64 373.677.51 12.235.00 176.67 75.07 73.160.69 556.96 643.549.17 81.90 96.018.00 151.07 1026.00 322.00 70.56 67.437.95 8.00 43.00 155.994.314.00 59.

00 170.31 1068.61 951.002 78.733.594 2.94 9.002 78.00 249.72 1270.158 62.00 209.00 217.00 0.00 165.159 53.00 155.117.00 229.534 55.782 139.509 2.101 76.46 74.78 8.259 82.26 8.00 151.200.001.762 2.368 54.018.204.668.67 1203.62 1060.209.615.49 8.697.553 2.610 78.00 183.398.493 2.472 2.00 147.411 82.65 9.8 1050 1026.035 50.73 1011.00 29 .00 0.00 212.366.00 210.598 79.742.908 64.40 10.633 77.00 0.31 1226.483 2.76 1108.57 1135.398.24 8.21 883.066 79.702 2.00 0.16 9.36 9.745.566.46 8.369 42.00 238.63 952.29 979.00 0.052.72 9.00 0.23 1118.00 205.00 0.13 10.00 0.81 8.674.24 8.17 1055.285 55.00 166.563 2.728 2.00 246.00 198.551 2.096.791 83.815 81.84 10.1 1080.013 77.487 2.00 0.867 61.00 0.535 48.673 2.507 2.546 78.493 75.458 78.783 59.00 0.449 62.029.687.119 46.873.00 0.271 81.423 81.493 75.00 214.511 80.708.12 10.579 2.00 0.743 49.27 1168.68 8.367 62.553 2.00 176.493 75.66 8.739 80.458 2.206 80.58 9.756 42.542 2.00 0.879 82.00 10.557 2.85 1013.410 50.41 1149.00 154.00 153.560 2.99 1125.513 0.12 8.00 185.247 83.10 10.00 248.949 76.838 79.497.96 8.16 8.409 55.943 43.575 58.52 1237.569 75.452 48.00 0.218 79.14 10.496 2.825 53.458 78.466 2.00 151.00 0.545 2.17 10.241 77.00 2.479 2.00 0.075 55.660 50.00 0.961 75.Regression Analysis of Kuala Lumpur Composite Index Before Time Lag AVERAGE LENDING RATE Percent per Annum CPI PENINSULAR MALAYSIA Index Number OFFICIAL RATE.552.6 957.495 2.555 2.642 74.00 0.58 1027.00 164.095 82.660 48.07 1136.756.522.617 55.950 55.71 9.408 58.879 81.00 176.72 1054.1 951.721 75.409 52.42 9.496 2.00 0.96 1216.00 0.00 222.499 2.00 146.075 55.32 1106.28 9.558 2.00 192.750 80.534 2.575 59.537 2.527 2.00 0.604 2.00 160.00 155.69 995.496.00 0.00 250.345.202 42.800.00 187.00 164.965.42 1084.13 10.51 1130.5 993.976.00 213.00 151.00 229.21 1015.44 9.01 1129.993 49.862.882.00 0.60 8.00 219.00 0.501 2.18 10.674.566 2.08 1189.00 0.00 0.843.543 2.783 58.83 8.47 8.00 0.00 0.577 45.994 45.205.25 9.13 10.575 81.00 0.67 8.408 55.078 78.575 81.64 983.266.529 2.709.00 0.00 0.480.00 0.31 8.688 2.13 971.07 1000.00 0.481 76.00 0.618 48.00 0.867 61.76 8.440 2.00 0.17 9.537 2.535 49.566.00 0. END OF PERIOD Ringgit per US Dollar KLCI DESCRIPTOR Index Number INDUSTRIAL PRODUCTION Index Number M2 Millions Ringgit FINANCIAL CRISIS Dummy M12 1993 M1 1994 M2 1994 M3 1994 M4 1994 M5 1994 M6 1994 M7 1994 M8 1994 M9 1994 M10 1994 M11 1994 M12 1994 M1 1995 M2 1995 M3 1995 M4 1995 M5 1995 M6 1995 M7 1995 M8 1995 M9 1995 M10 1995 M11 1995 M12 1995 M1 1996 M2 1996 M3 1996 M4 1996 M5 1996 M6 1996 M7 1996 M8 1996 M9 1996 M10 1996 M11 1996 M12 1996 M1 1997 M2 1997 M3 1997 M4 1997 1275.00 149.00 0.492 62.00 0.00 155.54 1141.

00 149.00 0.687.14 10.513 2.668.00 151.410 50.00 0.660 50.00 229.825 53.505 3.00 185.472 2.633 77.85 1013.00 187.575 59.00 0.481 76.00 0.943 46.745.00 0.324 67.993 49.458 78.958 3.408 58.949 76.00 176.577 45.783 59.13 10.00 164.674.204.62 1060.00 1.194 3.69 545.17 1055.00 0.674.00 0.83 1077.00 2.40 10.24 8.25 9.791 83.00 164.566.552.546 78.94 9.00 0.28 9.575 81.00 192.535 48.00 0.075 55.76 8.783 58.615.496 2.493 75.00 238.3 1012.095 82.27 1168.00 0.158 62.00 151.117.035 50.00 0.00 166.493 75.12 8.00 0.782 66.00 0.00 183.16 9.411 82.522.96 8.00 248.511 80.68 8.Regression Analysis of Kuala Lumpur Composite Index After Time Lag KLCI Index Number AVERAGE LENDING RATE Percent per Annum CPI PENINSULAR MALAYSIA Index Number INDUSTRIAL PRODUCTION Index Number M2 Millions Ringgit OFFICIAL RATE.84 804.449 62.00 147.610 78.00 153.00 214.430 3.00 170.708.00 1.501 2.52 1237.537 2.61 951.001.83 8.84 10.892 0.075 55.76 1108.563 2.742.00 217.513 2.493 75.00 0.553 2.247 83.535 49.209.569 75.00 0.81 8.00 229.41 1149.00 0.908 64.23 1118.642 74.72 1270.72 9.029.553 2.560 2.558 2.575 58.00 0.496 2.271 81.367 62.018.00 146.00 0.00 205.879 81.12 10.07 1000.00 30 .824 66.42 1084.46 8.00 209.873.64 983.976.00 219.566.398.21 1015.44 9.709.537 2.17 1104.159 53.409 55.13 971.741 139.259 82.483 2.862.631 2.527 2.466 2.00 1.00 250.00 198.557 2.00 155.44 9.07 1136.534 2.00 155.24 8.00 0.00 213.495 2.575 81.660 48.545 2.65 9.00 160.57 1135.00 0.096.066 79.13 10.00 0.961 75.555 2.00 0.10 10.879 82.46 74.26 8.525 2.29 979.493 2.00 0.458 78.739 80.57 664.00 0.408 55.96 1216.00 222.31 1226.497.398. END OF PERIOD Ringgit per US Dollar FINANCIAL CRISIS Dummy 1130.00 0.78 8.750 80.00 0.285 55.733.867 61.00 151.266.409 52.6 957.534 55.00 1.44 594.00 176.36 9.551 2.00 0.47 8.00 165.1 1080.00 0.407 62.00 210.218 79.509 2.00 10.42 9.241 77.543 2.965.487 2.00 0.882.721 75.71 9.078 78.496.458 2.00 0.756.566 2.206 80.815 81.21 883.617 55.950 55.00 1.18 10.052.00 0.8 1050 1026.4 814.800.423 81.67 8.990 65.200.743 49.00 155.69 995.529 2.002 78.598 79.49 8.31 8.618 48.08 1189.00 154.867 61.479 2.54 1141.002 78.101 76.00 249.843.17 10.66 8.838 79.01 1129.1 951.60 8.368 54.00 0.00 246.00 212.366.542 2.00 1.13 10.013 77.492 62.00 0.697.205.452 48.499 2.67 1203.00 0.440 2.31 1068.58 9.480.345.507 2.16 8.

Regression Analysis of Kuala Lumpur Composite Index 31 .

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