Stock Market Return Case Study
This Figure 3.1 show the relationship of stock market returns (KLCI) with four macroeconomic variables involved in this study which are money supply, exchange rate, inflation rate and crude oil price. KLCI is a major stock market index which tracks the 30 largest companies performance by full market capitalization listed on the Bursa Malaysia’s Main Board. The stock market return is the returns that investors generate out of the stock market. The four macroeconomic variables will be explained as below:
3.1.1 Money supply
In this paper, money supply is represented by M2 monetary aggregate. M2 can be defined broader classification of the money supply than M1, because it includes assets that are highly liquid but not cash. M2 consist all of M1 plus deposit in saving account, money market mutual funds and other time deposits. In general, it tends to be used as investment and increase wealth, or even to pay off loans, bills and taxes in a legitimate way. Therefore, M2 is better indicator for money supply.
According to Ariff, M., Chung, T. & Shamsher, M. (2012), the findings support that liquidity effect on stock market return. An increase in money supply lead to increase aggregate demand and economic activity. This will also cause higher liquidity, and making people feel wealthier and thus they will more prefer to invest rather than
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Inflation is the increase in the services and cost of goods which lead to fall in the purchasing power of a monetary unit such as Malaysian Ringgit. If people reduce their spending will cause Malaysian Ringgit instability and creates uncertainty in the economy. Thus, stock market return will be affected because the economy instability makes both domestic and foreign investors does not want to invest. According to Fama (1981) and Geske et al (1983) support the hypothesis that there is a negative relationship between inflation and stock market
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