The International Journal of Professional Management - ISSN 20422341
An Empirical Analysis on the Effect of Changes in Interest Rate on Different Sectors of Malaysian Stock Market
Volume 13, Issue 2, March 2018
Irfah Najihah Binti Basir Malan
PhD (Finance), Universiti Teknologi MARA, Malaysia
William Chua
PhD (Mgmt), MBA, BSc (Maths/Ed), MMIM, MIIKM, Honorary Fellow,
Professor and Doctoral Supervisor, IPE Management School, Paris
Abstract
A study on the effect of interest rate changes on different sectors of the Malaysia stock market is important in order to improve knowledge of which sectors are most affected by variations in interest rate. This study aims to identify the effect of interest rate on stock prices in the market, in different sectors and industries. It is based on weekly data from Kuala Lumpur Interbank Offer Rates (KLIBOR) and stock prices in nine different sectors from Bursa Malaysia, which is based on the weekly industry indexes (sectoral index). From the regression analysis, it can be said that only the technology sector (KLTEC) has a positive relationship with the interest rate; when the interest rate increases, the technology index will also gain. However, interest rate is capable in influencing businesses, particularly when it comes to leveraging. An increase in interest rate will impose burdens on businesses with debts, and to some degree lead to reduce in their stock prices. The reasons could be due to the investor confidence, market trust, alterations in resource allocation, competition and efficiency, and business operations which may be unable to continue to operate in daily activities.
Key words
Interest rate, Kuala Lumpur Interbank Offer Rates (KLIBOR), sectoral index, stock market, Malaysia
1. Introduction
The effect of interest rate towards stock prices is often regarded as a reliable measurement of the national economy. Stock prices are viewed as a reflection of future expectations for the financial markets. There are many factors that affect interest rate including action from the federal government, international forces (foreign investment), currency used in international trade, changes in the condition of the domestic financial system and the inflation.
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