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Granger Causality Relationship between Malaysia Equity Market and Exchange Rate Volatility

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Author(s): Mazila Md-Yusuf | Hamisah Abd Rahman

Journal: International Journal of Trade, Economics and Finance
ISSN 2010-023X

Volume: 4;
Issue: 1;
Start page: 19;
Date: 2013;
Original page

Keywords: Exchange rate volatility | equity market | Granger causality effect | GARCH model.

ABSTRACT
The relationship between equity market and exchange rates has often been discussed by economists since them both play important roles in influencing a country’s economic development. Therefore, the objective of this study is to examine the Granger causality effect between Malaysia equity market and exchange rate volatility. The focus of this study is on the overall and sectoral performance of the Malaysian stock market with Malaysian ringgit exchange rate volatility. The multivariate vector autoregression (VAR) framework estimations were utilized to capture the interactions between the equity market performance and exchange rate volatility. In the overall market performance, the results showed that there was a feedback interactions between Malaysia equity market and exchange rate volatility. However, in terms of the sectoral market performance, only the Industrial and Finance sectors that showed similar results as the overall market. Based on the findings, it is important for the Malaysian government to be cautious in their implementation of equity market and exchange rate policies especially those related to the Industrial and Finance sectors because such policies would impact these sectors.
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