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Effect of Macroeconomic on Stock Return

This research paper is conducted to measure and analyze the effect of macroeconomic on stock return of industrial product sector as compared to performance of Kuala Lumpur Composite Index. Several variables will be used to identify the relationship between the dependant variable which are three pre-specified macroeconomic variables the term structure of recession, interest rate, exchange rate and stock price movement that might give impact to the independent variable which is listed stock of industrial product sectors components in Kuala Lumpur Composite Index. Holding Period Return method will be used to measure the impact dependent variables to independent variable in this research. Secondary data will be used for this research paper, which are about 50 companies in industrial product sectors components that listed in Kuala Lumpur Composite Index; will be acknowledged as the sample for the previous year period from 2005 until 2009 to measure the performance of the sector in economic condition during the period. It is expected that during the period, the industrial sector’s performance that listed in Bursa Malaysia maybe will be affected by the economic condition during the period which will give impact on their stock return.




Macroeconomic and stock prices are difficult to predict most of the times. These changes it appears that reflect the shifting demand for that stock or changing facts that it because of expectations of a company’s profitability or some of government policy that effect on stock. Therefore, investors speculate how stock are determined most of them will look for to inexpensive share or expensive share with low price earning. Shares in most large established corporations are listed on organized exchanges like the Bursa Malaysia or Shanghai Stock Exchange.
Every time a stock is sold, the exchange records the price at which it changes hands. If, a few seconds or minutes later, another trade takes place, the price at which that trade is made becomes the new market price, and so on. Organized exchanges like the Bursa Malaysia will occasionally suspend trading in a stock if the price is excessively volatile and also must legalize trade according their regulation, if there is a severe difference between supply and demand or if they suspect that insiders are intentionally manipulating a stock’s price. But in ordinary circumstances, nobody is on purpose to control price.
The market price of a stock is basically the price at which a keen buyer and seller agree to trade. Price is volatile when the enormous volumes of stock traders are made awake of professional traders who buy and sell shares each and every one day long. Since these traders do not grab stocks over the long pull, they are not terribly interested in such long-term considerations as a company’s profitability or the value of its assets. Or rather, they are interested in such factors mostly trusty as news that would affect a company’s long-term prospects might cause other traders to buy the stock, causing its price to raise. If traders believe that others will buy shares, then he/she will buy as well, hoping to sell when the price rises. If others believe the same thing, then the wave of buying pressure will, in fact, cause the price to rise. This trend will continue forever.
When we look back to the famous economist John Maynard Keynes which has revealed the economic principle had compared the stock market to a competition then popular in British tabloids, in which rival had to look at photos and choose the faces that other contestants would choose as the prettiest. Each contestant had to look for photos “likeliest to catch the imagination of the other competitors, all of whom be looking at the difficulty from the same point of observation. similarly, stock traders try to speculation which stocks other traders will buy. The successful trader is the one who anticipates and outfoxes the market, buying prior to a stock’s price rises and selling before it falls.

1.0.1 Screening criteria of KLCI

Investor can only invest in stocks through a stock exchange, an organized marketplace where stocks are bought and sold under strict rules, regulations and guidelines. KLCI has over 30 listed companies offering a wide range of investment choices to local and global investors. Companies are either listed on Bursa Malaysia Securities Main Market or ACE Market.
The Stock Market was created by companies wishing to raise capital for their business. When someone says they have a listed company they indicate listed on Bursa Malaysia. All companies need cash to take advantage of growth opportunities. Many start-up companies however find themselves short of capital to fund expansion. One way to acquire this cash is to publicly float the company. This involves selling part of the company to private individual and institutional investors who are then able to freely exchange these stocks on an open market Most huge matter regarding to the criteria’s are, high market capitalization on stock itself, it reflects how much share have been issues and its price per share. Blue chip company is resistance to weak market and it has permanently growth for example nestle it has stable growth in term of profit and cash flow.

1.0.2 History of stock Market

The Kuala Lumpur Stock Exchange which was incorporated on December 14, 1976 as a company limited by guarantee took over the operations of KLSEB in the same year.
The Kuala Lumpur Stock Exchange Berhad was demutualized pursuant to the Demutualization Act and converted into a public company limited by shares on January 5, 2007. Upon the conversion, the organization vested and transferred the securities exchange business to a new wholly-owned subsidiary, Bursa Securities, and became an exchange holding company and were renamed Bursa Malaysia Berhad on April 14, 2007.
On 18 March 2005, Bursa Malaysia made its first appearance on the Main Board of Bursa Malaysia Securities Berhad. On 6 July 2009, the Composite Index has been replaced by FTSE Bursa Malaysia KLCI index which reflect the top 30 companies in the exchange. On 4 August 2009, the exchange has combined the main board and the second board into a single market which is called the “Main Market”. Mesdaq is also renamed into ACE market which provides lower listing requirements.


Every time a share in, say, nestle is traded for example, the new price is used to revalue all outstanding shares-just as the value of your home appreciates when the house down the block sells for more than a similar house sold last week. But the value of your home wouldn’t be so high if every house on your block were suddenly put up for sale. Similarly, if all ten billion outstanding shares even a small fraction of them-were put up for sale, they wouldn’t fetch anywhere near the current market price. (Pirie and Smith, 2003) have say that relationships between accounting information, book values and share prices have significant implications for share prices in Singapore.
Foreign exchange rate and interest rate risks are important financial and economic factors affecting the value of common stocks. Research by (King and Wadhwani, 1990) found that the volatility transfer hypothesis suggests that random shocks can induce higher volatility in financial markets and because of contagion effects which are highest in more volatile markets, investors may look abroad to invest in alternative financial assets.
This study was aimed to point out whether the stock price behaviors and macroeconomic variables such as foreign exchange rate and interest rate is reflected in listed company stock return in the KLCI or not. Because one of them is accounting factor and other are economic factor.


The problem studied in this research is about the movement of the stock market and selected individual stock prices for investor’s usage. Caution should also be exercised in interpreting their results as the period of study includes the 2008 financial crises. It is possible that the severity of the crisis has influenced the statistical results.
These papers empirically compares and see the share price of the companies before, during and after the recession and it covers only two macroeconomic factor that have give some effect to the stock return. During this period we will see the flow of the price movement in the market by using fifthly (50) listed company in property sector. Previous studies on stock market by Deshmukh et al (1983) banks can affect their exposure to interest rate and foreign exchange rate changes when they act as financial intermediaries for their clients. As such, their role as financial intermediaries can affect the sensitivity of investor assets and liabilities to interest rate and foreign exchange rate changes


This research is conducted to inquire:
1.3.1 If there any changes of stock return on listed KLCI industrial company effect of macroeconomic?
1.3.2 If there any changes of stock return on listed KLCI industrial company effect of volatile market share price?
1.3.3 Which investment could offer better stock return to investor if using Holding Period Return?


This research is conducted to determine:
1.4.1 Macroeconomic factor have give impact to the stock return.
1.4.2 Changes of share price have give impact to the stock return.
1.4.3 The investment that could offer better performance using Holding Period Return.


This research is an observed study upon the macroeconomic factors and changes of stock price that give impact to the stock return of industrial product listed in KLCI. The study is significance for researcher, government and investors.
Researchers can be benefit from this study by the information and acknowledge they from the previous to the current and future trend of movement either macroeconomic factors and changes of stock price that give impact to the stock return.
As for the government, they can assist in organizing and stabilizing the economy to make the market will always gain some profit to the investors in attract more investment to come to Malaysia.
Investors will gain benefit by knowing the current condition of Malaysia stock market as well as the shares before they can invest their pool of money in Malaysia especially in the industrial company.


Macroeconomic and share price is the environment in which all firms operate. The ability to forecast the macroeconomic and share price can translate into spectacular investment performance. Some of the key economic variables are inflation, interest rate and exchange rate.
In economics, a recession is a business cycle contraction, a general slowdown in economic activity over a period of time. During recessions, many macroeconomic indicators vary in a similar way. Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization, household incomes, business profits and inflation all fall during recessions; while bankruptcies and the unemployment rate rise.
Recessions are generally believed to be caused by a widespread drop in spending. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation. High interest rates reduce the present value of future cash flow, thereby reducing the attractiveness of investment opportunities. For these reason, real interest rate are the key determinants of business investment expenditures because sensitive to interest rate affect to interest payment.
The foreign exchange market or currency market or Forex is the market where one currency is traded for another. It is one of the largest markets in the world. Some of the participants in this market are simply seeking to exchange a foreign currency for their own, like multinational corporations which must pay wages and other expenses in different nations than they sell products in. However, a large part of the market is made up of currency traders, who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates.
In the foreign exchange market there is little or no ‘inside information’. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time.
This study takes place in the subsistence of macroeconomic and changes of stock price in Malaysia as its field is the one to be explored. Moreover 50 listed companies were acknowledged as the sample for the previous five year period. The data of this research will be obtained from DataStream.


There are several drawbacks in pursuing this research. It includes:

1.7.1 Scope of study

The research reference is restricted in the scope of Malaysia due to the field of study. As we know, Malaysia is an emerging country, thus the performance is still not matured compared with the developed countries, like the United States.

1.7.2 Period of the study

This study is conducted by using the data from 2005 to 2009. Approximately 50 form 100 companies that listed in Bursa Malaysia, but not all the companies’ data was provided in that certain period. This constraint is affecting the calculation of portfolio performance. The length of the study also affected this study indirectly. This study used to use five years period of time. The result for five years study would be different if this study managed to use the longer period of time.

1.7.3 Secondary data

In this study, we used the secondary data gathered from DataStream, Bursa Malaysia and the other articles references. Some of the data were not up to date to be the good references. For example, when we referred to Bursa Malaysia, some of the data is not currently in use and in DataStream; the problem was some of the data was not available (N/A). It became a limitation to the study because we cannot get the accurate result.


1.8.1 KLCI
Kuala Lumpur Composite Index or Bursa Malaysia is place where all sector company list their stock to get capital gain from investor that buy their stock.


There are many reason why this research been conduct but to know the real effect to the stock return many variable been use to meet the objective. For example interest rate, exchange rate, recession and stock price movement is the variables that have effect to the company or investor stock return.




Macroeconomics is a branch of economics that deals with the performance, structure, behavior and decision-making of the entire economy, be that a national, regional, or the global economy. Along with microeconomics, macroeconomics is one of the two most general fields in economics.
Researcher study aggregated indicators such as GDP, unemployment rates, and price indices to understand how the whole economy functions. Macroeconomists develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance. In contrast, microeconomics is primarily focused on the actions of individual agents, such as firms and consumers, and how their behavior determines prices and quantities in specific markets.



The effect of macroeconomic fundamentals on stock market volatility has generated a lot of interest. Research by Liljeblom and Stenius (1997) find that it is argued that if the value of corporate equity on the whole depends on the health of the economy, then uncertainty in macroeconomic conditions would affect volatility in stock returns assuming consistent discount rates. Studies have also shown that stock market volatility is driven by uncertainty in macroeconomic fundamentals Fama (1981, 1990), Fama and French (1989) and Chen et al. (1986).
It is argued that there is an inverse relationship between interest rates and stock returns. Thorbecke (1997) and Smal and de Jager (2001) observe that a reduction in interest rates induces an injection of liquidity into the economy. This extra liquidity could be channeled to the stock market, driving up the demand and prices of stocks. Patelis (1997) notes that interest rate changes are helpful in predicting stock market returns over a long period. Thus, there is evidence to conclude that interest rate policies should also target stock market price movements. Goodfriend (2003) also notes that, since there is no stable correlation between stock-price returns and short-term interest rates, it would be difficult for interest rates to target stock-price changes appropriately. Bernanke and Kuttner (2003) also note that stock markets do not react much to interest rate changes.
Throughout the years, the global economy has been transformed from a simplified financial architecture to a complex intertwined set of financial systems. From the Bretton Woods system to the advent of flexible exchange rate systems in 1973 until the present days, the environment of international markets had experienced substantial changes in the form of excessive variability in exchange rates, greater capital mobility and punctuated by a series of financial crises worldwide in recent years. Meese (1990) who studied the currency fluctuations in the post-Bretton Woods era found that the changes of macroeconomic variables alone could not explain major currencies movements. MacDonald and Taylor (1994) however noticed relationships between macroeconomic variables and exchange rate. A recent study by Rapach and Wohar (2002) meanwhile produced mixed results for the monetary model of exchange rate determination.
In December, 2007 economic recession that began in the United States spread much of the industrialized world, and has caused a uncertainty of economic activity. This global recession has been taking place in an economic environment characterized by various imbalances and was sparked by the outbreak of the financial crisis of 2007–2009. However, Mitchell and Netter (1989) argue that the three-day decline preceding the crash was a large enough decline that it became the fundamental news and that shook the market. The theoretical model of Jacklin et al. (1992) (among others) shows how a surprise significant drop in the market could have provided information to the market that would directly lead to a crash.
Among all macroeconomic factor stock price movement is also effect by changes in economic environments. CR&R (1986) results are tested to see whether the factors priced in the US market are applicable in Turkey stock market, with adding new variable unemployment rate, because we expected a relation with the stock returns.


Four factors are selected to test the relationships of these factors and stock return. The factors are recession, interest rate, exchange rate and stock price movement.

2.2.1 Recession

Recession is one of the macroeconomic factors that effect to the listed company stock return in KLCI. Some of the researcher say that recession have give negative impact to stock return but some researcher found that recession is no relation with stock price. CR&R (1986) shown that the tested macroeconomic variables do not affect the share price in the UK stock market.

2.2.2 Exchange Rate.

Exchange rate is most been use by investor to do transaction to buy stock in market, because of that exchange rate is consider one of the factors that effect to the stock return. Movements of exchange rate are always a concern for various parties. In international currency markets, exchange rate plays a significant role and the variability of exchange rate, whichever way it sways, tends to give a significant impact on the economy.

2.2.3 Interest Rate.

Interest rate also one of the factor that give impact to the stock return because some researcher say that interest rate give negative impact to the stock return. Anthony Kyereboah-Coleman and Kwame F. Agyire-Tettey (2008) mention that there negative real interest rates for extended period.

2.2.4 Stock Price Movement.

Stock price move is most related to the stock return because every time changes in stock price effect to the outcome of stock return for investor investment but some of the researcher say that there is no effect on stock return. For example Martinez and Rubio (1989) tested the Spanish market return and they found that there were no significant pricing relationship between stock returns and the macroeconomic variables.


Literature review is the part where it shows where it show whether the variable will be strongly acceptance or not. From the previous study that has been done it has shown that, most of the variable has its own importance not only in affecting some issue but also in solving it. This literature reviews shows the effect of this study on the stock return as the dependent. It also has many researches done with the difference result.




This chapter discusses the research methodology used in the study. Methodology is one the important method that had been use to test the hypothesis on this study in order to get the finding at the end of the study. Research design and research methodology is most of the important part for this study since it provide a lot of useful information on how to get the data, how to conduct the survey and provide additional information in order to get better result and finding for this study.
This chapter explains how the data for conduct the study is collected and carried out. It also explain on the method that is going to be use to get the finding at the end of the study. It also focus on the data sources, sample involved in the study and the methodology to be use in this study. In this study the variables that had been used was economic recession, exchange rate, interest rate and stock price which collected on the monthly basis for the period of 5 years ended in December 2005 until December 2009.
This study consists of 50-industrial product firm and using time series period from 2005 to 2009. Focus for this study was more on the Regression Model analysis to test the finding. Since this study was investigate and identify the relationship between macroeconomic and stock price movement to profitability so using the regression data analysis model had done it for the past 5 years..
There are several key items such as data collection method, sampling frame, sources of data, variables and measurement, research design, theoretical framework, hypothesis statement, data analysis, and treatment which will clarify in detail in this chapter.


The price indices at monthly frequency are collected for sectors in Bursa Malaysia: industrial product sector. All the closing prices of these sector indices sourced from the secondary data from Thomson Financial DataStream over five-year period from year 2005 to year 2009 (5 years). Meanwhile, for the independent variables of recession rate, exchange rate, interest rate and stock price will be extracted from Thomson Financial DataStream and Bank Negara Malaysia official release.


To secure an acceptable result, this study decided to use 50 samples out of all companies that went public and were listed on the second board within year 2005 to 2009. The decision to use this sample was due to the inability to collect more data due to the time constrain during research. Furthermore, this study wants to see the stock return for investor in industrial product sector. And at the same time, it also wants to observe the relationship between recession rate, exchange rate, interest rate and stock price.


The selected 50 stock sample being chose from the main board of BM KLCI .The data are collected on monthly actual stock price was collected from the Thomson Financial DataStream, which is provided the information about the companies’ financial situations over years. Each stock is already being issued from the companies issued until today. These samples were represented by 50 companies from the industrial product sector.


There are two types variables has been used in this study there are; the dependent and the independent variables.

3.4.1 Dependent Variables

The dependent variable for this study is stock return of each company industrial product sector.

3.4.2 Independent Variables

The independent variables will be measured by recession rate, exchange rate, interest rate and stock price.


This research is designed to see the relationship between dependent variable with independent variables. In this study, it analysis in hypotheses testing that will explain the certain significant correlations between KLIBOR and Treasury Bills rates and the stock performance

3.5.1 Purpose of the Study

The purpose of this study is to determine the relationship between all the dependent and independent variable. By using descriptive study can know relationship between both of variable. Descriptive study will be able to describe the characteristics of the variable of the situation. By using data from DataStream would be able to compare monthly return for each of the companies. Besides that, this study also can help investor to make decision making and offer the idea for future problem and research.

3.5.2 Types of Investigation

The study involved the correlation study types of investigation. The study involves determining the important variable associated with the situation. The important variable is between the recession rate, exchange rate, interest rate and stock price. Correlation studies done in the study are called field studies. This studies will conducted to establish cause and effect to the stock return using the same measurement in the market are called field experiments. The experiment done to establish the cause and affect of the studies so that can make corrective action to make any decision in the investment.

3.5.3 Unit of Analysis

In this study, the unit of analysis is group of company and also industry. The group of company that involve fifthly (50) of the properties companies that has been selected in the main board of BM KLCI. The companies selected depend on the year of the companies is establish. The industry that has been selected is recession rate, exchange rate, interest rate and stock price will be compare with the return of each companies return during 5 years.

3.5.4 Time Horizon

This study will be use cross-sectional studies to make the research. A study will be done with the monthly data are gathered over five years (5) from year 2005 to 2009, in order to get the result about these studies.


Research studies indicate that relationship between KLIBOR and Treasury Bills rates and stock performance.
Dependent variable: Effect of company Stock Return
Independent variables: Recession rate, Exchange rate, Interest rate and Stock
Price Movement.
Figure 1: Schematic Diagram (Relationship Diagram)
Independent Dependent
Company Stock return listed in KLCI
Stock price movement
Interest rate
Exchange rate
Recession rate
According to the schematic diagram above, it can be explaining relationship between stock return with Recession rate, Exchange rate, Interest rate and Stock Price Movement.


Multiple Linear Regression Model are the statistical tools that been use in this study. This model analysis examine about simultaneous effect between Recession rate, Exchange rate, Interest rate and Stock Price Movement (independent variable) Stock Return (dependent variable) which variable give biggest effect on the dependent variable.
Y = Dependent variable which represent Actual Stock Performance
= The constant number of equation
= Coefficient Beta value
= Independent variable which represent Recession rate
= Independent variable which represent Exchange rate
= Independent variable which represent Interest rate
= Error
r = (EV – BV) + DIV X 100
BVStock price movement will be measure in Holding Period Return to determine the effect on stock return
r = Represent Rate of return
EV = Represent Ending Value or end of stock price
BV = Represent Beginning Value or beginning of stock price
DIV = Represent income or dividend of company


Some changes will affect the each stock return to the companies. By changing the stock price will affect the return to the companies its self its might be go higher or lower than what it expected will be.
To analysis and to test whether this is applicable to the Malaysian Stock Market, the hypothesis has been developing.
Hypothesis 1
H0 = Company stock return in industrial product sector outperform than KLCI
H1 = Company stock return in industrial product sector underperform than KLCI
Hypothesis 2
H0 = Macroeconomic factor does has significant impact in stock return of each company in industrial product sector in KLCI
H1 = Macroeconomic factor does not has significant impact in stock return of each industrial product sector in KLCI
Hypothesis 3
H0 = Stock price movement does has significant impact in stock return of each industrial product sector in KLCI
H1 = Stock price movement does not has significant impact in stock return of each industrial product sector in KLCI


This study will be measure according the objective that has been established in earlier chapter. This research can be use to help investors to make the investment decision. It’s because this studies focuses on the data from year 2005 until year2009, it will give better overview of each of the properties company in order to take any corrective action in facing the problem and also overcoming the problem in the current situation to make an investment decision.

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