EFFECT OIL PRICE, INFLATION RATES AND EXCHANGE RATES

TOWARDS STOCK MARKET RETURN

PREPARED BY:
NORAZIZAH EDAHYU, NURFASHEILA, NOOR HANA. AJ, NUR AIN SHAFIQAH
Bachelor Of Business Administration (Hons) Finance, University Of Technology Mara,
Sabah.
SUPERVISED BY:
ASSOC. PROF. DR. IMBARINE BUJANG & MDM. DELIA L.OLAYBAL

ABSTRACT
This research conducted to examine the relationship between oil prices, exchange
rates, inflation rate towards stock market return in Malaysia, Singapore and Indonesia
during the global financial crisis. This research investigated on how oil prices, inflation
rate and exchange rates affected the stock market. After the Asian financial crisis (199798), exchanged rates become one of the main factors towards the volatility in stock
market prices. On the other hand, in year 2007-2009 (Global Financial Crisis), by using
the panel data analysis under the Multiple Linear Regression, we wanted to show either
the volatility in oil prices, inflation rate and exchange rate would influence the stock
market return or not.

INTRODUCTION
The Global Financial Crisis that began in the middle of 2007 has introduced similar
circumstances of economic hardship to all corners of the world. The KLCI, which is the
main index and market indicator in Malaysia, dropped around 670 points within the
period of 14th of January 2008 to 12th of September 2008 and this comes to around a
45% drop in its value. That was the biggest decline in the KLCI value after the East Asian
financial crisis of 1997. In addition, stock market in Indonesia and Singapore was not
exception effected by global crisis. It made the confidence of the investor drop affected
by the impact on global stock markets, where securities suffered large losses during the
late 2008 and early 2009.
According to Nurul, Zuraidah, and NorAzurah (2012), Mainstream economic theory
suggested that exchange rates were determined by macroeconomic variables such as
inflation rate, exchange rates and the fluctuation of oil price and also suggested that there
was a relationship between macroeconomic variables and stock prices performance. The
escalation in oil price and the instability of exchange rate were said to effect greatly on
the stock market. Hence, this paper applied an extended to focus if there was a difference
on the effect of oil price, inflation rate and exchange rate movement towards FTSE Bursa
Malaysia KLCI, Singapore Stock Market (STI) and Indonesia Stock Market (JCI) during
the global crisis in year 2006-2009.

LITERATURE REVIEW
From previous researchers which were conducted by Park and Ratti (2008) and
Nandha and Hammoudeh (2007) found that the Indonesia, Malaysia and Singapore were
sensitive to the oil price changes while according to Park, Arif & Shin (2009), Malaysian
and Indonesia stock market was affected by economic indicator that focusing on inflation
rate, exchange rate and oil price during the global crisis. But, the countries were able to
recover quickly rather than during the Asian Financial Crisis occurred on 1997-1998.
On the other hand, Norasibah et al (2009) found that, changes in oil prices had no
effect on the stock market both in the short-run and long-run by using the implemented
Vector Auto-Regressive Methods. Besides, according to Menike (2006) by using Multiple
Linear Regressions stated that exchange rate, oil price, and inflation rate respond
negatively to the stock prices. According to Hondroyiannis and Papapetrou (2001), their
findings differ from the previous studies where the results indicated the actual inflation
does not significantly influence real stock market returns as well.
DATA AND METHODOLOGY
The data used in this study from FTSE Bursa Malaysia Kuala Lumpur Composite
Index (KLCI) as the Malaysian stock market basis while for Singapore from Singapore
Stock Market (STI), and Indonesia stock market get from Indonesia Stock Market (JCI).
The oil price data was extracted based on West Texas Intermediate crude petroleum as
primary proxy. As for the exchange rate, the data were obtained from the International
Financial Statistics published by the International Monetary Fund. After all the data were
collected, these data would be keyed into the STATA Software which was under the Data
Analysis and Statistical Software.
All the data were collected using Multiple Regression Panel Ordinary Least Square
(OLS) over four years from 2006 until 2009. The method that had been used to test these
data was the panel data analysis under the Multiple Linear Regression Model. This model
involved the association between the value of the dependent variable and independent
3

variables. This method provided the analysis on how the independent variables affect the
dependent variable. As mentioned, the independent variables were the oil price, inflation
rate and exchange rate where they were interpreted into an equation as below:
Yit = + 1x1it + 2x2it + 3x3it + it

Where:
Y = Represent the Dependent variable which is the stock market
= The constant number of equation
= Coefficient Beta value
x1 = Independent variable which represent the Oil Price
x2 = Independent variable which represent the CPI
x3 = Independent variable which represent the exchange rate
= Random Error
i = Country (Malaysia, Singapore and Indonesia)
t = Times (Years = 2006-2009)
FINDINGS
Hypothesis Statement was constructed for each variable. Hypothesis was developed
to analyze the validity of the theory formulated. Based on the previous research findings,
there were three testable hypotheses formulated for difference exchange rate regime.
Each hypothesis was tested to find its corroboration. The value of coefficient could be
measured in negative or positive value. In our study there were two hypothesis made in
order to know the results which were:
H1: There is relationship between the oil price, exchange rate and inflation towards
the stock market.
H0: There is no relationship between the oil price, exchange rate and inflation
towards the stock market.

Table 1: Result on Stock market performance with the economic indicators

Dependent Variable: Stock Market Performance
Independent
Variable
Oil Price (OP)

t-value
p-value

Fixed Effect

Random Effect

Pooled OLS

0.0106
3.76
(0.009)***

0.0118
4.03
(0.0001)***

0.01185
4.03
(0.004)***

45.682
0.46
(0.664)

105.59
1.11
(0.268)

105.59
1.11
(0.300)

Exchange Rate
(ER)

t-value
p-value

-0.4586
-0.63
(0.554)

0.0459
0.20
(0.840)

0.04594
0.20
(0.845)

Constant

t-value
p-value

2474.64
0.84
(0.432)

302.86
0.78
(0.437)

302.86
0.78
(0.459)

R- squared

0.8382

0.9761

0.9761

F- Stat
p-value

6.97
(0.0222)**

N/A

108.79
(0.0001)***

Wld Chi Square

P- value

N/A

Inflation (CPI)

t-value
p-value

326.37
(0.0001)***

N/A

Breush Pagan LM Test

P- value

1.92
(0.1655)

N/A

Hausman Chi (2)

P value

0.50
(0.9190)

N/A

Notes: ***, ** and * in the parenthesis denotes significant level at 99%, 95% and
90% respectively.

Based on Table 1, the Yit intercept of the regression equation was 302.8384. The
results showed that only the oil price that had the relationship towards the stock market
(0.004***) while the other two independent variables which are inflation rate (0.300) and
the exchange rate (0.845) did not have the relationship towards the stock market. The Rsquared data showed that there was 97.61% give the most affected by the inflation rate,
oil price and exchange rate towards the stock market and the rest which was 2.39%
affected from the other independent variables.

CONCLUSION
This study examined whether there was an effect of oil price, inflation rate and
exchange rate changes towards the stock market among the three Asian countries which
were Malaysia, Indonesia and Singapore. From the analysis conducted, only the oil price
rate was found to have a significant impact towards the KLCI in Malaysia, also in the
stock market of Indonesia and Singapore as well. The results also stated that the exchange
rate changes and inflation rate did not give a major impact or influence on the stock
market movement towards these three countries. It meant that, there was no the
relationship of the inflation rate and exchange rate towards the stock market among the
three countries. Other than that, the oil price shown positive coefficient impact towards
the stock market due to all countries that related toward oil price could predict their cost
during the four years chosen. According to the previous empirical studies, it showed that
only the inflation rate and the exchange rate that had a major impact or influence towards
the stock market. On the other hand, in our findings, it was differed to the previous
empirical study where we found that only the oil price that had a major impact or had
positive relationship towards the movement of stock market return among Malaysia,
Indonesia and Singapore.

REFERENCES

Nurul. H. J., Zuraidah. S &NorAzurah. M. K. (2012), Exchange Rate

Transition: Effect Of Exchange Rate, Inflation And OilPrice Towards Stock
Market.

Nurasibah et al (2009), Stock price movement: Does change in energy price

matter?. ISSN, Volume 2,Issue No.1: pp 01-18

Park, J.W., Ratti, R.A., 2008, Oil Price Shocks and Stock Markets in the U.S. and
13 European Countries, Energy Economics 30, 2587-2608.

Mohan Nandha and Shawkat Hammoudeh. (2007) Systematic risk and oil price
exchange rate sensitivities in Asia Pacific stock markets: Research in International
Business and Finance 21, pages 326-341.

Hondroyiannis, G., Papapetrou, E. (2001). Macroeconomic Influences on the

Stock Market. Journal of Economics and Finance, 25, 33-49.

Menike, L.M.C.S. (2006), The Effect of Macroeconomic Variables on Stock

Prices in Emerging Sri Lanka Stock Market. Sabaragamuwa University Journal ,
Volume 6, No. 1: pp 50-67

Park, D., Arief, R., and Shin,K. Why did Asian Countries Fare Better during the
Global finacial Crisis than during the Asian Financial Crisis, pages 105.

http://www.stata.com/

http://investorrelations.sgx.com/stocklookup.cfm?
mode=&historic_Month=12&historic_Day=31&historic_Year=2008

http://databank.worldbank.org/data/home.aspx

http://www.tradingeconomics.com/analytics/api.aspx?source=chart

http://www.bursamalaysia.com/market/

COURSE OUTCOMES
SD
1. We should be able to discuss the function and development
of the securities industry with emphasis on the Malaysian and
world markets.
2. We should be able to appraised securities using relevant
valuation models.
3. We should be able to apply finance theories in investment
decision making.

Notes: (SD = Strongly Disagree), (D = Disagree), (N = Neutral), (A = Agree), (SA = Strongly Agree)

SA