MACROECONOMIC DETERMINANTS OF STOCK MARKET PERFORMANCE IN MALAYSIA: EVIDENCE ON THE DOMINANT ROLE OF EXCHANGE RATE
DOI:
https://doi.org/10.35631/AIJBES.829066Keywords:
Exchange Rate, FBM KLCI, Inflation, Interest Rate, GDP, Malaysian Stock MarketAbstract
This study investigates the macroeconomic determinants of stock market performance in Malaysia, with a focus on identifying the dominant factor between exchange rate (ER), inflation rate (IN), interest rate (IR), and gross domestic product (GDP). By utilizing the Arbitrage Pricing Theory (APT), this study adopts a quantitative study method, using annual secondary data from 2005 to 2024 (n=20) from the International Monetary Fund (IMF), World Bank, Department of Statistics Malaysia, and Bursa Malaysia. Performance of the stock market is measured through the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI). Descriptive statistics analysis, Pearson correlation analysis, Variance Inflation Factor (VIF) testing, and multiple regression analysis with robust standard errors were used to investigate the relationships between variables. Empirical findings show that the exchange rate has a positive and statistically significant impact on the Malaysian stock market (β = 0.9597, p < 0.001) as it captures 89.9% of the variation in KLCI (R2 = 0.8991). However, inflation rate (p = 0.585), interest rate (p = 0.441) and gross domestic product (p = 0.409) positively but statistically insignificantly related to KLCI. These results suggest that Malaysia's export and trade-dependent economy make the stock market highly sensitive to fluctuations of currency exchange, while domestic macroeconomic fundamentals have negligible short-term influence. The findings are essential for investors, policymakers, and researchers as they highlight the importance of exchange rate stability as an instrument for the management of stock market volatility in emerging economies.
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