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Siew-Pong Cheah, Thian-Hee Yiew and Cheong-Fatt Ng
''A nonlinear ARDL analysis on the relation between stock price and exchange rate in Malaysia.''
( 2017, Vol. 37 No.1 )
This paper analyzes the relation between stock prices and exchange rates in Malaysia using monthly observations from 1993M01 to 2015M12. Although plenty of studies have discussed on this issue by employing various empirical techniques, these studies often assumed that the dynamics between stock prices and exchange rates are symmetric. This study wonders if introduction of nonlinearity in exchange rate movement can shed new light on this issue, with application of the recently developed nonlinear autoregressive distributed lags (NARDL) technique. The bounds test of the NARDL specification indicates the presence of cointegration among the variables, which include the stock returns, currency appreciations and depreciations, national production, money supply, and inflation. The estimated NARDL models suggest that exchange rate movements have significant short-run and long-run effects on stock prices in Malaysia, and that stock market responds asymmetrically against currency appreciation and depreciation. Namely, in the long run, changes of KLCI are only responding to RM depreciation but not RM appreciation. In addition, stock price–exchange rate relation is sensitive to observation periods and change in exchange rate regimes.
Keywords: Stock price, Exchange rate, Nonlinear ARDL, Asymmetry
JEL: F3 - International Finance: General
Manuscript Received : Nov 14 2016 Manuscript Accepted : Feb 22 2017

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