Causal Relationship Between Local and Foreign Tranche Stock Returns in the Malaysian Securities Market

Abstract

‘This paper tests for cointegration and establishes the Granger causal relationship between the local and foreign tranche returns of seven stocks listed in the Kuala Lumpur Stock Exchange (KLSE) that have the: company’s memoranda of association amended to allow for foreign ownership of these shares. Long-run relationship is present in the case of Arab Malaysian Finance Berhad, Southern Bank Berhad and Pacific Bank Berhad. It is found that the local and foreign tranche returns of all seven stocks are causally related but the causality direction differs. Three stocks, Malaysian Intemational Shipping Corporation, Public Finance Berhad and Pacific Bank Berhad, witnessed the local tranche returns Granger causing the foreign tranche res. The foreign tranche is found o lead the local anche in the case of Public Bank Berhad and Southern Bank Berhad, while feedback exists between the wo tranches ofthe stocks of Arab Malaysian Finance Berhad and Hock Hua Bank Berhad. The causality direction can possibly be explained by average return as well as return volatility if at least one of the ranches of a stock earns positive return.