Money growth and Malaysian stock prices: A test of policy ineffectiveness proposition

The policy ineffectiveness proposition proposed by Lucas (1972) and Sargent and Wallace (1975) along the rational expectation model is tested in this study. The proposition claims that unanticipated changes in monetary aggregates exert significant influence on real economic activities while anticipated policy is neutral. In line with this, the efficient market hypothesis indicates that in an efficient market share prices incorporate anticipated information instantaneously leaving only the unanticipated components of the information set to affect share prices. We investigate this proposition on the Malaysian stock returns. Specifically the response of share returns toward changes in actual and decomposed (anticipated and unanticipated) growth of monetary aggregate is analysed. The single equation regressions and the system estimation of Vector Autoregressions (VAR) both point toward the validity of the proposition. The results indicate that positive reactions of share returns to actual money growth are due to the unanticipated components. Movement of share prices is neutral with respect to the anticipated monetary growth. The findings generally favour the policy ineffectiveness proposition that leads to an efficient pricing process for Malaysian shares

The Tenth Malaysia Plan: Transformation Towards a High Income Advanced Economy

First of all, thanks for giving me the opportunity to share some of my views despite coming back just recently. Before I move ahead, I would like to just quickly give some quick overview of something very relevant with what we are going to discuss today because the 10th Malaysia Plan is unique in a couple of ways. First of all, in terms of the preparations for the plan. This time the 10th Malaysia Plan was prepared ahead of time, earlier than the schedule. It was not as usual because it was tabled last year. Basically, it was for implementation purposes as it was starting in 2011. And there are a couple of other changes in terms of how the government plans, in the 10th Malaysia Plan, to disburse the funds for development.

Testing the Lucas critique in Malaysia: a comment

The advent of ’rational expectation hypothesis’ (REH) in 1970’s sparked intense debate on the effectiveness of discretionary aggregate demand policies in influencing real economic activities. In line with this, the Lucas Critique (Lucas, 1976), that embodies the REH, questions the efectiveness of policy rule that frequently adopted in the set up of monetary policy. This commentary revisited the foundations of Lucas Critique and empirical studies reported by Habibullah, Azali dan Baharumshah (2001) (in short, HAB) on the validity of the critique within the Malaysian economy. The Lucas Critique is explained in greater detail based on an economic model that incorporates the behaviours of economic agents that form their expectation rationally. Brief empirical analysis indicates that rejection of Lucas Critique as proposed by HAB requires further invesigatations before it can be a generalization

Money Growth and Malaysian Stock Prices: A Test of Policy Ineffectiveness Proposition

The policy ineffectiveness proposition proposed by Lucas (1972) and Sargent and Wallace (1975) along the rational expectation model is tested in this study. The proposition claims that unanticipated changes in monetary aggregates exert significant influence on real economic activities while anticipated policy is neutral. In line with this, the efficient market hypothesis indicates that in an efficient market share prices incorporate anticipated information instantaneously leaving only the unanticipated components of the information set to affect share prices. We investigate this proposition on the Malaysian stock returns. Specifically the response of share returns toward changes in actual and decomposed (anticipated and unanticipated) growth of monetary aggregate is analysed. The single equation regressions and the system estimation of Vector Autoregressions (VAR) both point toward the validity of the proposition. The results indicate that positive reactions of share returns to actual money growth are due to the unanticipated components. Movement of share prices is neutral with respect to the anticipated monetary growth. The findings generally favour the policy ineffectiveness proposition that leads to an efficient pricing process for Malaysian shares.

On the predictive power of the Malaysian T bills term spread in predicting real economic activity

The ability of financial market interest rates to predict real economic activity has gained considerable attention of economics and financial researchers. In this regard, the term spread, i.e. the difference between long term and short term yield is argued to be an effective indicator to predict economic cycle. We investigate this proposition for the Malaysian economy using the T bills discount rates. Our results of both, single and multi-equation system of vector autoregression (VAR), support the case for Malaysia Current T bills spread is shown to be a significant indicator for annual output growth for up to six months ahead. We also show that information conveyed by the term spread is unique and not of those implied by the monetary policy. Our results also indicate that, the power of term spread is limited for the near term predicition and over the long run money dominates spread in predicting output

An evaluation of the market-timing and security-selection performance of mutual funds: The case of Malaysia

In this article, we examine market-timing and security-selection performance of a sample of Malaysian mutual funds. We used Jensen’s (1968; 1969) model to test for the overall fund performance and employed the model developed by Merton (1981) and Henriksson and Merton (1981) to highlight the separate contributions of market-timing and security-selection performance to the overall fund’s return. Consistent with most previous research, we find evidence that the funds provide investors with overall negative return performance. Since such performance evaluation ignored the existence of timing activities among fund managers, it attributed the overall negative performance exclusively to the manager’s security-selection efforts. When we model timing and selectivity simultaneously using the Henriksson and Merton’s (1981) model, we find evidence of negative market-timing performance by fund managers. Perhaps more importantly, our results suggest that after accounting for the manager’s market-timing ability, the manager’s security-selection ability no longer contributes significantly to the overall fund performance. That is, the overall negative return performance of the fund is driven by the poor timing ability of the fund manager. The evidence presented highlights the importance of considering both the market-timing and the security-selection abilities of the fund manager when evaluating the performance of mutual funds to avoid erroneous conclusions regarding the fund performance

Financial liberalization, innovation and the response of Malaysian commercial banks’ portfolios to monetary shocks

Several recent theoretical papers have shown that banking institutions posses a special role in the transmission mechanism of monetary policy. The reactions of banks toward changes in monetary conditions, particularly their portfolio allocations, determine the ultimate impact of monetary policy on real activities. In addition, several findings also indicate the changing behaviour of commercial banks in recent years due to the development of financial markets and liberalization process which begin since early eighties. This paper examines this issue for the Malaysian banking industry. Without exception, liberalization and innovation that occur in the Malaysian financial industry since early eighties also affect the way banks respond to changes in monetary policy. It is shown that banks resort to competitive funds and securities liquidation in their attempt to shield the lending capacity. This is made possible by the recent development in the banking industry. It is argued that the central bank loses to some extent, its direct influence on banks portfolio allocations, thus, reducing the effectiveness of monetary policy. Studying the transmission mechanism of monetary policy, therefore requires special attention to the behaviour of banking firm

Term structure of interest rate: an empirical test of the expectation hypothesis on the Malaysian T- Bill Market

Interrelationship between short and long term rates is vital in the understanding of interest rate behaviOur expectation hypothesis claims that the yield of the long term instrument is equal to the average of the short term rates that prevail over the long term period. According to the theory, the unobserved future spot rate can be determmed from the observed spot rate. This is possible because the observed rate contains superior information of market expectation. This study investigates the validity of the expectation theory on the Malayswian T bill market for a period of 17 years (1974 - 1990). Regression and correlation analyses are used in testing the hypothesIs. The result supports the validity of the expectatIOn theory. The two expectation models employed, I.e., Perfect-ForesIght Model and Error-Learmng Model, confirm the notzon of expectatIOn hypothesIs, The forward rate Implied by the term structure form as an unbzased estlmate of future spot rate. The validity of the expectatIOn theory in different interest rate environments (declining or increasing) is also tested. The result suggests consistency in validity in all subperiOds. However, the accuracy of the predictiOn increased substantially toward the latter end of the period under study. This reflects the interest rate deregulation process which took place in the Malayszan financi market in recent years

The stochastic behavior of stock indices: a test of long memory in the Kuala Lumpur Stock Exchange

Characterization of the stochastic process of stock market indices is vital in understanding the behavior of stock prices. Conventional share valuation models are subject to the nature of inter-temporal dependence between current and past movements. This paper studies the stochastic process of four KLsE indices (Composite Index,Industrial Index, Finatice Index, and Property Index). In addition to the standard unit root tests, the ARFlMA (Autoregressive Fractionally Integrated Moving Average) model which belongs to the class of long memory process is applied in the empirical analysis. The findings indicate that while the level of the indices is nonstationary, its growth rate exhibits stationary properties. Long memory is not supported for the level of the indices but is evidenced in its monthly growth rate. The growth rate of the indices can therefore be characterized as a long memory process that is mean reverting

The relationship among the nominal rates of interest, the real rates of interest and the inflation rates: an empirical study of the fisher effect on the Malaysian T Bill Market

The Fishenan hypothesIs assert's that, If the expected real rate if interest is constant and therefore independent of expected inflation, each percentage pOint rise in the expected inflation 'esults in a percentage point rise in the nominal rate of interest. This paper tests the validity of the hypothesis on the Malaysian T Bill market. In conjunction to that, the interactions of the three variables, namely, nominal rate of interest, real rate of interest and the price -level were explored. This study found that the positive response of nominal rate toward the expected inflation increases gradually as maturity increases. In contradiction to the Fisher effect, the expected rate of lnflation was found to be a major determinant factor or the expected real rate, instead of the nominal rate. Thus, a nonvariant character of the real rate is rejected. In addition, past inflation rates do not possess any valuable information in forecastingfuture nominal or real rates. The sign of inefficiency in the market exists since the nominal rate is unable to summarize all information from previous price levels