Domestic Money, Foreign Money and the Performance of Malaysian Common Stocks: A Long Run Equilibrium Analysis

Abstract

The long run relationship between monetary conditions, i.e. changes in monetary aggregate, with performance of stock prices in developing financial market such as Malaysia is investigated in skis study. We enhance existing literature by examining both, the domestic and foreign, monetary conditions in our analysis. With the increasing degree of financial liberalization together with she rapid process of economic globalization, performance of stocks in developing small open ‘economies such as Malaysia are more exposed to monetary conditions abroad. Our results support he cointegration hypothesis between stock prices and money supply (domestic and foreign). Dynamic analysis of cointegrated series based on the error correction estimations indicate that variations ix monetary aggregates dictate the long run equilibrium path for Malaysian stocks. The results ‘also support the increasing influence of foreign monetary conditions (i.. the U.S. money supply) in setting long run movements in the Malaysian stock prices. The evidence presented highlights she importance of incorporating data on monetary conditions in stocks analysis and the increasing role of foreign economic conditions (particularly those of developed nations) in influencing performance of stocks prices in developing small open economy.