Empirical Evidence on the Relationship between Stock Market Volatility and Macroeconomics Volatility in Malaysia

This paper examines the relationship between stock market returns volatility in Malaysia with five selected macroeconomic volatilities; GDP, inflation, exchange rate, interest rates, and money supply based on monthly data from January 2000 to June 2012. The volatility in this paper was estimated using GARCH models, and the relationship between stock market volatility and macroeconomic volatilities has been examined using bivariate and multivariate VAR Granger causality tests as well as through regression analysis. The authors found little support on the existence of the relationship between stock market volatility and macroeconomic volatilities. The result from regression analysis shows that only money supply volatility is significantly related to stock market volatility. The volatilities of macroeconomic variables as a group are not significantly related to stock market volatility. The weak relationship between stock market volatility and macroeconomic volatilities is possible due to lack of institutional investors in the market, and may also indicate the existence of information asymmetry problem among investors.