Macroeconomic variables and stock returns in Malaysia: an application of the ARDL bound testing approach

The study seeks to explore the extent to which macroeconomic variables affect the stock market behavior in the emerging market of Malaysia in the post 1997 financial crisis period, using the latest time series econometrics technique to test for cointegration, namely, the Autoregressive Distributed Lag (ARDL) model. The estimation of results suggest that real effective exchange rate, money supply, industrial production index, and federal funds rate seem to be suitable targets for the government to focus on, in order to stabilize the stock market and to encourage more capital flows into the economy. Changes in U.S. monetary policy as measured by the changes in the federal funds rate seem to also have a significant direct impact on the Malaysian stock market behavior during the period of analysis. This implies that any changes in the U.S. monetary policy affect the Malaysian stock market.