The Causes of Stock Market Volatility in Malaysia

Abstract

‘This paper examines the causes of stock market volatility by looking at the determinants of the movement the small, internationally integrated Kuala Lumpur Stock Market (KLSE). It gives new evidence thatis sy 10 interpret by including both the financial and the business cycle variables. It employs low frequency monthly data including stock market returns, interest raes, exchange rates, inflation, the money supply and th industrial index forthe period October 1992 to December 199, To overcome the geoblem of inefficient estimations due o generate regressors, the model jointly estimates the conditional solailties of al variables using the GLS estimation procedure and the Hendry general-to-specific estimation strategy. Among the most important determinants of the conditional volatiily in the KLSE mex are th lagged conditional volaily nthe index isl, th conditional volatiles in money supply, dustrial index and inflation rate. The conditional volatiles that have an immediate effect on he stock soatility are those from inflation rate and the industrial index. It i also found that industrial index has he greatest and the most significant impact on the stock's conditional volatilities No evidence is found ihe impact of the conditional volatilities in foreign exchange rate and interest rate on th stock market.