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Macroeconomic variables and stock return in Malaysia

CHAPTER 1 INTRODUCTION Pricing stocks has a great concern by investors and they believe that the change of stock prices were sensitively to economic news. Chen et al. (1986) was found out that the stock returns are exposed to systematic economic news. If the stock influenced by systematic economic news and there are no profit return in order to compensate the risk. Besides that, some investor would predict the fluctuation of stock prices base on their daily experience and some unanticipated events which influence the stock prices. However, in 1976, Stephen Ross was developed Arbitrage Theory Pricing (APT) to determine which of the macroeconomic factors influence to stock returns rather than investors determine stock price base on their experience estimation.
Overview of Malaysia stock market Malaysia is potential country for investors to have new business opportunities because the countries have economic growth. Ali (2001) was stated Malaysia stock market was growth in line with rapid economic expansion during the past decades. Since the Malaysia stock market was influence by economic, there are very important for macroeconomic management in order for Malaysia economic growth stability and social progress.
The development of Malaysia economy was referring to the successful transformation from a mainly raw material producer (1970s) into a multi-sector economy (1990s). In 2007, the economy of Malaysia was announced the 3rd largest economy in Southeast Asia and 29th largest economy in the world by purchasing power parity with gross domestic product for 2008 of $222 billion. The growth rate from 5% increase to 7% since 2007. In 2009, GDP per capita (PPP) of Malaysia was reached US$14,900. At the same time, the nominal GDP was US$383.6 billion, and the nominal per capital GDP was US$8,100.
Besides that, Malaysia population was gradually increase, for instance, Khal Mastan (2006), a senior Consultant with Pegasus Business and Market Advisory stated that Malaysia’s population is becoming increasingly urban. The country’s urban population increased from 54.7% to 62.8% of Malaysia’s total population from 1995 to 2004. On 2009, the population was estimated over 28 million. This show a good phenomena to a country because with sufficiency manpower, the country economic would growth.
Problem Statement There many researchers tested on the stock return and macroeconomic factors in different country with different macroeconomic variable. However, they are no standard benchmark which can follow. For instance, Chen, Roll and Ross, (1986) also stated that there are no satisfactory theory could be argue that the relation between financial markets and the macroeconomic is entirely in one direction. Therefore, it is attract attention for many researchers to run the research regarding the stock return and macroeconomic factors.
In various studies, researcher would like to use exchange rate, interest rate and inflation as their tested variable on stock return because they believe government financial policy and macroeconomic event have large influence on general economic activities in an economy including the stock market which stated by Adam and Tweneboah (2008). Once again motivates researchers to investigate the relationship between stock returns and macroeconomic variables.
Besides, some of the stock market still under explore because the result obtained by researches were ambiguous. Samitas and Kenourgios pointed out the majority of empirical work which specific test on long-term stock market in mature market than emerging market and provided a range of ambiguous and inconsistent conclusions although they had empirical study as an evidence to support there are co-integration relationships in a number of markets. However, this is useful for the in emerging stock markets which have low correlations with mature markets.
Research Questions In this study, the researcher may raise some question that relate with the macroeconomic factors influence on stock return based on Malaysia stock market. Below is the research question:-
What are the macroeconomic factors that influence on stock return of Malaysian stock market?
What are the relationship between the factors (oil price, gross domestic product, inflation rate, unemployment rate) and stock return of Malaysia stock market?
Research Objectives The study wants to ascertain the stock return effect by macroeconomic factors based study on Malaysia stock market. By doing this research, the researcher has developed major objectives, which is:-
To examine macroeconomic factors that might have an influence in determining the stock return of Malaysia stock market.
To determine the relationship between factors (oil price, gross domestic product, inflation rate, unemployment rate) and stock return of Malaysia stock market.
Significance of the study This study is relevant and of much interest to the stock investors particularly those interested investing in Malaysia listed companies and they would hesitate to know about the macroeconomic factors which will influence Malaysia stock market. In addition, finance researcher would get an idea whether stock return effect by oil price, gross domestic product, and inflation and unemployment rate of Malaysia stock market before doing their research. This finding also could useful for investors make correct decision on their stock investment by referring the manner of the macroeconomic influence Malaysia stock market. If the macroeconomic have a relationship with stock return, investors probably need to hedge its stock price or vice versa. This also could bring alert to investors to be aware to those influential macroeconomic factors on stock return. Therefore, investors could maximize profit through their stock investment.
Limitation of the study There are various types of industry in Malaysia listed board and it would forgo some industrial because of the randomly choose.
Variables used as predictors, as there still other variables not been used (i.e. exchange rate, interest rate, export and import ).
Time, it had a limited time.
CHAPTER 2 LITERATURE REVIEW 2.1 INTRODUCTION Chapter two is the literature review which provides the theoretical and empirical information to study macroeconomic factors and stock return of Malaysia stock market. It is also used as foundation for interpretation the study’s results and analysis the findings then formulate our hypotheses.
2.2 EMPIRICAL EVIDENCE There are plenty of empirical researches regarding macroeconomic factors on stock return by using different macroeconomic variables to test on it. Furthermore, some research result was showing different countries was influence by different macroeconomic factors. For instance, Gunsel and Çukur (2007) examined the performance of the Arbitrage Pricing Theory (APT) in London Stock Exchange from 1980-1993by using OLS technique. They were using seven macroeconomic variables to test in their study which is interest rate, the risk premium, the exchange rate, the money supply, unanticipated inflation, sectoral dividend yield and sectoral unexpected production. The result showed that macroeconomic factors have a significant effect in the UK stock exchange market but each factor may affect different industry in different manner. Test results also support that there is no significant relationship between unexpected inflation and sectoral return when the efficient market hypothesis for the unexpected inflation case. In addition, market predicts it and incorporates into the stock prices before announcement. Besides, the effective exchange rate is one of the important factors for industries. Lastly, they figure out that some industries could not eliminate the exchange rate risk because they don’t have much knowledge about sectoral movement of exchange rate or sectoral productivity.
Tursoy, Gunsel and Rjoub (2008) were test the Arbitrage Pricing Theory (APT) in Istanbul Stock Exchange (ISE) for the period of February 2001 up to September 2005 on monthly base by using ordinary least square (OLS) technique. The macroeconomic variables that they used in their study is money supply (M2), industrial production), crude oil price, consumer price index (CPI), import, export, gold price, exchange rate, interest rate, gross domestic product (GDP), foreign reserve, unemployment rate and market pressure index (MPI). They examined 13 macroeconomic variables against 11 industry portfolios of Istanbul Stock Exchange to observe the effects of those variables on stocks’ returns. The study was showed that macroeconomic variable may affect different industry in different manner, for example, a macroeconomic variable may affect one industry positively, but affect the other industry negatively. Lastly, they found out there is no relationship between the macroeconomic variables and stock market return.
Adam and Tweneboah (2008) studied about the role of macroeconomic variables on stock prices movement in Ghana from 1991 to 2006. They were using Johansen’s multivariate co-integration test and innovation accounting techniques to analyze both long-run and short-run dynamic relationships between the stock market index and the economic variables. The tested macroeconomic variables such as inward foreign direct investments, the treasury bill rate (as a measure of interest rates), the consumer price index (as a measure of inflation), and the exchange rate. They finding showed that there is co-integration between macroeconomic variables identified and Stock prices in Ghana indicating long run relationship. They also prove that the interest rate and Foreign Direct Investment (FDI) are the key determinants of the share price movements in Ghana.
Kandir (2008) was investigates the role of macroeconomic factors in explaining Turkish Stock returns for the period of July 1997 to June 2005. The macroeconomic variables been used is the growth rate of industrial production index, change in consumer price index, growth rate of narrowly defined money supply, change in exchange rate, interest rate, growth rate of international crude oil price and return on the MSCI World Equity Index. Empirical findings indicate that exchange rate, interest rate and world market return seem to affect all of the portfolio returns, while inflation rate is significant for only three of the twelve portfolios. The exchange rate is significant because the increase of the tourism activities and foreign in recent years. The interest rate on stock returns showed negative effect but Turkish stock returns were not influenced by the inflation rate. This finding may suggest that technique of hedging could not be use against inflation. Besides, industrial production, money supply and oil prices were no significant affect on stock returns.
Robert and Gay (2008) were investigating the relationship between share prices and economic activity in emerging economies. They were study about the time-series relationship between stock market index prices and test on two macroeconomic variables which is exchange rate and oil price for Brazil, Russia, India, and China (BRIC) using the Box-Jenkins ARIMA model. The finding obtained there are no significant relationship between exchange rate and oil price on the stock market index prices of either BRIC country because the influence of other domestic and international macroeconomic factors on stock market returns, warranting further research. Furthermore, there was no significant relationship found between present and past stock market returns, suggesting the markets of Brazil, Russia, India, and China exhibit the weak-form of market efficiency.
THEORITICAL LITERATURE Arbitrage pricing theory (APT) is a theory which investigated by economist Stephen Ross in 1976. This theory is an asset pricing theory and it would bring affect to the pricing of stocks. APT explained that there is a linear relationship between required return and macroeconomic factors; the sensitivity to changes in each factor is represented by a factor-specific beta coefficient. Jay Shaken (1992) proof that any variable correlated with the factor can be the benchmark in an approximate APT expected return relation when in the single factors case. If the result obtained significance which could be a new direction for empirical work on “arbitrage pricing” is outlined. Besides, the asset price should equal the expected end of period price discounted at the rate according to the model. If the price diverges, arbitrage should bring it back into line. In addition, APT not same like the Capital Asset Pricing Model (CAPM), which specifies returns as a linear function of only systematic risk APT may specify returns as a linear function of more than a single factor. Dybvig and Ross (1985) were examined the relationship between APT and CAMP. They were prove that the CAPM is not applicable to the APT which follow the Shanken’ assertion, meanwhile, the finding also showed that APT is a testable model.
THEORITICAL FRAMEWORK Voluminous of the research on stock return was concentrate on industrial production, inflation and others but not much of empirical studies test on gross domestic product and unemployment rate. Base on this, the framework of study was constructed to identify relationship between stock return and macroeconomic factors.
Figure 1 below shows the dependent variable is the average stock return; meanwhile the independent variables are oil price (OP), gross domestic product, inflation (INTL) and unemployment rate (UNP) of the Malaysian’s farming and fishing companies which listed in Bursa Malaysia.
Figure 1: Theoretical Framework of study
HYPOTHESES Hypothesis 1 H01: There is no significant relationship between oil prices and the stock returns of Malaysia multinational companies.
H1: There is a significant relationship between oil prices and the stock returns of Malaysia multinational companies.
Hypothesis 2 H02: There is no significant influence of gross domestic product on the stock returns of Malaysia multinational companies
H2: There is a significant influence of gross domestic product on the stock returns of Malaysia multinational companies.
Hypothesis 3 H03: There is no significant influence of inflation rate on the stock returns of Malaysia multinational companies.
H3: There is a significant influence of inflation rate on the stock returns of Malaysia multinational companies.
Hypothesis 4 H04: There is no significant influence of unemployment rate on the stock returns of Malaysia multinational companies.
H4: There is a significant influence of unemployment rate on the stock returns of Malaysia multinational companies.
CHAPTER 3 RESEARCH METHODOLOGY Introduction This chapter presents the methodology and the procedure used in measuring the variables used by the researcher. The chapter provides detailed steps of the way to conduct the analysis of the stock return for 30 Malaysia’s multinational companies which listed in Bursa Malaysia. It is included sample of companies’ measurements of variable and data collection method.
3.2 Sample of firms The analysis of stock return for 30 multinational companies which listed in Bursa Malaysia main board and the data was retrieved from Data Scream. The sample included the industrial sector according to the classification of Bursa Malaysia board. The all stocks in different industrial sector available on Data Scream will take under consideration. However, the final sample of this study was 30 out of 50 multinational companies for eleven years from the period 1999 until 2009. Our studies would select the company as sample after screen the available data during the eleven years period. The breakdown of the sample into each industry is shown in table 1.
Table 1: Sample of 30 Malaysia’s Multinational companies NO.
Heavy constructions
Clothing and accessory
Building Mat

Main Factors Which Affect Price Elasticity Economics Essay

The companies in the market values the importance of profits as the effects of price changes directly relates to total revenue earned. Total revenue defines as the total amount of money earned by selling the product in a given time and it is also linked to price elasticity of demand. When there are changes in the total revenue which is opposite to the price, the demand is deemed elastic. If the total changes in the total revenue are the same directing of price, the demand is inelastic. While the total revenue is unchanged when price changes, this demand is unit-elastic (McConnell et al., 2009).
The availability of substitute is one of the main factors which affect price elasticity. The general rule of thumb is that if there are more substitute for any given product, the more elastic the demand will be. Taking an example like the price of coffee. When the price of coffee increases, consumers will then switch to drinking tea instead to get their daily dosage of caffeine, which will result in a large decrease in demand for coffee. This product is deemed to be an elastic product. On the contrary, if the price of caffeine is to increase, there will be no change in the consumption of coffee or tea and there is no or little substitute to caffeine. Consumers will still want to buy either coffee or tea no matter what the price of caffeine will be. Hence caffeine is considered and inelastic product due to its lack of substitute in the market. Another product deemed to be inelastic is diamonds. Because they have few and no substitutes (Investopedia, 2010)
The below graph shows the concept of inelastic demand curve;
* Data adapted from McConnell et al. (2009)
The inelastic graph above shows a steeper downward slope which means that there is little change in quantity when there is a large change in price.
* Data adapted from McConnell et al. (2009)
The above graph shows an elastic demand curve which displays a gentler gradient and almost horizontal downward slope. This depicts when there is a decrease in price, there will be a huge increase in demand.
(McConnell et al., 2009).
Retailers most of the time would like to adopt a business practice called “price skimming”. This practice allows the seller to set a higher price on a newly launched product to generate more revenue from customers who is eager to pay more for it for the purpose of using it earlier than others. The success of this practice will depend greatly on the inelasticity of demand of the product in the market. This form of practice usually reaps more monopoly profits for the seller during this short-term period. While there is a great increase in profits, other competitors will then be enticed to “hitch a ride” as well resulting in more competition. At the same time, the price of the product will decrease overtime when more “players” are in the same market.
There is much advantage in this form of practice as a form of recouping cost for fund used in research and development of the innovative product, advertising and promotion costs. In this way, the practice of price-skimming allows some returns on the set-up expenditure. By charging a high price initially, the main supplier will have the freedom to adjust the price when competition arrives. However, when the price is set too low initially, it will be difficult and not wise to increase the price as this will affect the loss in sales volume. With the high cost of the product, it sets the tone of having a superior-quality complexion over its rivals. This is especially true for the industry of “designer-label” clothing. The consumers in this market will be more brand conscious than price conscious, thus enabling them to spend more in regards to the price. In order words, the more expensive the product is, the more customers will want to buy it (Tutor2U, 2010).
This fully concludes that the seller’s intention to sell at a higher price is looking at high returns of revenue and profits. On another hand, seeking high returns will have to fully depend on the elasticity of the demand of the product and what strategy the company is going to adopt in order to achieve its strategic objectives.
Question: 1B Demand refers to quantity of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand (Investopedia, 2010).
If there is a cut in supply of cars in Singapore, supply will shift leftwards from S to S2. Quantity of supply will drop from Qe to Q2. There will be a shortage of cars to deal with the current demand. As there are insufficient cars to meet the demand, suppliers will increase the price of the car to P2 (McConnell et al., 2009).
Demand and Supply Graph for Cars (Current Quarter) * Data adapted from McConnell et al. (2009)
The degree to which a demand reacts to a change in price is call elasticity. Elasticity varies among products because some goods may be more essential to the consumer .As cars are luxury goods, the demand for it will depend on its price, consumer income and the presence other substitutes. Price increase of a good that is considered less of a necessity will deter more consumers because the opportunity cost of buying the product will become too high. In the next quarter, the demand for cars will be foreseen to decrease due to its elastic demand (Investopedia, 2010).
Demand Elasticity Graph for Cars * Data extracted from Investopedia (2010)
Car is considered to be elastic as a slight change in price leads to a sharp change in the quantity demanded. The demand curve looks flatter or more horizontal as substitutes are available and consumers may not necessarily need them in his or her daily life.
When price increases, the buying power of consumers will decrease as the amount of income available to spend on the car will decrease. For example, if the price of the car goes up from $500 to $800 (monthly installments) and income stays the same; the income that is available to spend on car will become more insufficient. The consumer is forced to reduce his or her demand on cars. With an increase in price and no change in the amount of income available to spend on the good, it will result in elastic reaction in demand (demand will be sensitive to a change in price)
In addition, Singapore has advanced transportation services. Consumers can easily switch to public transport if they cannot afford to get a car after the price increase (the more substitutes, the more elastic the demand will be). The higher prices will lead to consumers to cut back their purchase of cars. The demand will be is elastic, or sensitive to change because a raise in price will cause decrease in demand as consumers cuts down on car purchase and take more public transport instead (Investopedia, 2010).
To conclude, cut in supply of cars in Singapore will lead to an increase in price. However, due to higher price, limitation in income and high availability of substitute; demand will decreases in the next quarter.
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