Team Spread and Stock Market Returns: The Information Content of the Malaysian Government Securities Yields

Abstract

The predictive power of term spread, i. the difference between long and short term interest rates, is investigated in this study. We propase that the term spread of the Malaysian government securities ‘embodies vital information of future long run movement of stock returns. Our results indicate that the Malaysian term spread is useful in signaling the long run direction of Malaysian stock returns. The moving average series of four major Kuala Lumpur Stock Exchange (KLSE) indices: the Compasite Index, Industrial Index, Finance Indes, and Property Index, are shown to be significantly affected by lagged term spread up to about six months. Nevertheless, term spread is not a significant factor that drives short run movement instock prices. Our results are strengthened by the evidence that shows the uniqueness of information carries by the term spread. The significance of term spread remains intact even after the effect of monetary is taken into account. The findings add to the list of studies that supports the predictive power of term spread. This evidence of predictive pawer of term spread in developing financial market such as Malaysia certifies the increased efficiency of securities pricing largely due 10 the rapid process of development and liberalization that are taking place in Malaysian government securities market since early 1959.