Authors: Roohollah Zare, Mohamed Azali, Muzafar Habibullah

Title: The reaction of stock prices to monetary policy shocks in Malaysia: a structural vector autoregressive model

Abstract

This study examines the response of stock prices to monetary policy shocks using the structural vector autoregressive (SVAR) model with short-run restrictions appropriate for Malaysia. The empirical results for the period 1990:1-2011:12, show that the response of stock prices to positive changes in short-term interest rate (money supply) is negative (positive) and statistically significant only in the short-run consistent with the prediction of asset pricing theories. The response of stock prices to shocks from other variables considered in the model indicate that the largest response is to the unexpected increase in the exchange rate which is negative and statistically significant during the entire forecast horizon followed by the response to oil price shocks (supply shocks) which is negative and statistically significant up until the seventh month after the shock.