Global commodity prices, domestic financial conditions and equity market performance in Malaysia: evidence from a vector error correction model

Global commodity shocks and changing financial conditions can influence economic and financial resilience in emerging economies through interconnected international and domestic markets. Understanding these transmission mechanisms is important for assessing the vulnerability of emerging-market economies to external disturbances and their implications for investment and economic stability. This study examines the long- and short-run relationships among global commodity prices, domestic sovereign bond yields and the Malaysian equity market (FBM KLCI), with particular attention to the transmission of external market conditions into Malaysia's domestic financial system. Using synchronised daily data from 22 May 2020 to 24 March 2025, we estimate a Vector Error Correction Model (VECM) incorporating the FBM KLCI, West Texas Intermediate (WTI) crude oil prices, London gold prices and 10-year Malaysian Government Securities (MGS) yields. Augmented Dickey–Fuller tests indicate that the variables are integrated of order one, while Johansen tests identify cointegrating relationships among them. The long-run estimates show that higher bond yields, gold prices and crude oil prices are each associated with lower equity valuations, with domestic bond yields exerting the strongest effect. In the short run, the FBM KLCI corrects approximately 17.30% of its deviation from equilibrium per trading day