Investigating the effect of price of rubber fluctuations on stock prices and exchange rates in Malaysia

Abstract

This paper examines the relationship between the stock price and nominal exchange rate in Malaysia to ascertain the significance of using rubber price as a correction mechanism. The Johansen cointegration test was employed to investigate the effects of linear combination and the relationships among the components in a multiple time series. A two-regime, intercept-adjusted Markov switching vector error correction model was also used to examine the parameters concerned. Rubber price is used as a correction mechanism. Because rubber is one of Malaysia’s main exports, using rubber price as a correction mechanism may affect the country’s economy. The results of this study show that the said variables have cointegrating relations. Further, the nominal exchange rate has a negative relationship with the changes in stock price. Markov switching vector error correction model was found to be suitable for examining the data as the findings had a small variance.