The Relationship of Equity Sector Returns and Composite Index in Malaysia

Abstract

This paper examines the relationship between sectoral equity index returns with the composite index in theMalaysian stock market over the period of 1999 to 2019. The wavelet method has been used to decompose equity returns into different time series frequencies and Multivariate-GARCH Dynamic Conditional Correlation (DCC) to examine the volatilities and correlations of equity indexes. The wavelet coherence analysis indicates a higher co-movement between returns on sectoral equity index with returns on the Malaysian stock index during sample period. The results suggest that the return of the equity sector leads stock market returns except for industrial, plantation, tin mining and trade and services. There is also overall increase of short, medium and long-run co-movement between equity sector and market returns. Moreover, the plantation, properties and tin and mining sector have negative unconditional correlation with the stock market, which is a good sign of diversification benefits. The findings highlight the importance of taking into consideration the time and frequency-varying properties as investors can minimize risk through diversification