Arbitrage pricing theory and influences of macroeconomic factors in Malaysian capital market / Karunagaran A/L Madhavan and Deviga A/P Vengedasalam

This study was done to examine the influences of macroeconomics factors in determining the stock market return. Monthly closing price of 100 common stocks (stocks which are listed under the Kuala Lumpur Composite Index) were taken for the period of January 1997 to December 2001. Six macroeconomics variables were selected for this study based on some prior research. Variables are Money Supply, Trade volume, Interest Rate, Inflation Rate, Industrial Production Index and Composite Index. Data analysis was done by using Microsoft Excel and Statistical Package for Social Science (SPSS).

Three hypotheses were tested in this study. First issue discussed was on the Multiple Regression in determining the relationship between stock market return and macroeconomics variables. Industrial Production Index and Composite Index gives the most significant relationship compared to other variables. Whereas, we also hypothesize the correlation coefficient between variables and findings indicate exists some relationship between variables.

Test on the stock pricing movement using two-stage regression model does not provide any significant results since the p-value of risk premium associated with the macroeconomics variables is less than 0.05. Overall findings shows exist some relationship between macroeconomics variables and stock market returns but these variables could not explain on the stock pricing movements.