Indian Journal of Science and Technology

Abstract

This study aims to examine the relationship between top ten constituents in FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) with a set of macroeconomic variables and industrial production using Johansen co-integration test. This study also analyzes the respond of each macroeconomic variable on the stock indices using Impulse Response Function (IRF) and forecast error decomposition. The findings show a long-run relationship between each stock index in FBM KLCI with macroeconomic variables and that the shocks of stock indices on its own shock contribute the largest portion followed by money supply. In addition, we apply GARCH (1, 1) model to determine which macroeconomic affects volatility of stock indices. The result shows that macroeconomic volatility does not affect much on Genting and IHH Healthcare, but Public Bank Bhd, Tenaga Nasional, Malayan Banking, CIMB Group Holdings, Axiata Group Bhd, Petronas Chemicals Group Bhd are affected by the volatility of macroeconomic variables.

Keywords: Forecast Error Decomposition, Impulse Response Function, Johansen Co Integration Test