A dynamic causality of oil prices and economic indicators on stock returns / Mohd Amirul Shahril Ludi

This study examined the relationship between oil prices and the stock market prices (KLCI) in Malaysia and considered exchange rate and interest rate as the additional determinants. Monthly data of oil prices, interest rates, exchange rates between MYR and USD as well as stock market indices were modeled into a multiple regression model.Granger causality test was utilized to test whether there was any causal linkage between stock prices and macroeconomic variables. Six hypotheses were developed to test the relationship between the macroeconomic variables and the performance of the KLCI stock market. The data stretching from 1994 until 2012 were collected from Bloomberg Database. The data were analyzed by using the Multiple Linear Regression test, Johansen Cointegration Test and Granger-causality test to accommodate the research objectives. The objectives of this paper are (i) To examine the causal relationship between the macroeconomic variables towards the stock market price, (ii) To determine whether the oil price, inflation and exchange rate can affect the stock market price, (iii) To evaluate whether the oil price, exchange rate and inflation can explain the movement of stock market price.The general findings suggest that, there are evidences of bilateral relationship between share prices with two important independent variables namely inflation and exchange rate.

Keywords: Granger Causality, Multiple Regression Model, KLCI Stock Prices, crude oil price, inflation rate, exchange rate.