ARCH and GARCH Based Tests on The Malaysian Stock Market, Interest Rate And Exchange Rate Before And During The Currency Turmoil

Abstract

“This paper attempts to investigate the volatility of the Malaysian financial markets before and during the Southeast Asian currency crisis. The objective of this study is to provide some information on he behaviour of three important financial variables namely the stock market, interest rate and exchange rate which have been badly affected by the crisis. Using the GARCH (1,1) models, the paper investigates the volatility of the three variables before and during the Southeast Asian currency crisis. The results of this study suggest that only KLCI has the ARCH effect before the turmoil but all the variables have the ARCH effect during the turmoil. The results of GARCH(1,1) model indicate the presence of GARCH effects in al the variables before and during the turmoil except for KLIBOR for the period before the turmoil. It is also discovered that the persistency of the volatility for individual variables implies a permanent impact on future volatility. However, when two other variables squared returns are introduced, the coefficients for all individual variables reduced significantly with the exception of KLCI. Therefore, the persistency of the volatility may imply a transitory impact on future volatility or the volatility may decay with time. It also suggests that the persistency of the coefficient for each variable can also be explained by information from the other two variables.