MOD001170 Leadership And Management

Introduction

This piece of the paper tries to analyze the research topic that is that is in question in this paper in order to understand the underlying problem and thereby take various analytical steps with the help of various evaluation tools to find out the problem and take steps to rectify the mistakes(Abdullahet al. 2014). This chapter involves the introduction of the topic, the overview of the study, the research problem, and the statement of the research, the aims and the extent of the analysis, the identification of the gap, research questions, the hypothesis, implication, restraints and the synopsis of the topic.

Introduction to the topic:

It is known that one of the mainlyresponsive assets to the economic situation is Stocks. The economy faces a negative impact due aggressive transformation in the price of the stocksthat leads to a fundamental relationship among the stock returns and the variable that are macroeconomic in nature. Therefore, it is seen that the problem related to this is mainly the one of the most discussed topic in the background of finance for previous few years.

The awareness gained by the stock market is not restricted to the researchers and the policy makers but attractions are even gained towards the association between the variables and thestock market that are macroeconomic in nature. The attention given to this relationship is mainly due to three factors(Alrubet al. 2016). The first reason is that the makers of the policy will be able understand the full impact on the upcoming regulations and policies.  Secondly, the investors can make more knowledgeable decisions when they realize the relationship and thereby reduce the degree of exposure to the risk. Finally, if the consumers are conscious of the transformation that may take place in the financial market and thereby the factors related to the shock can be minimized, which will motivate the public to undertake protective measures. These attentions were mainly in focus in developed countries and there were very few researches and analysis that were undertaken with respect to developing countries. The association between macroeconomic variables and the stock market are different for developed and developing countries. The paper therefore, tries to discover the connection between four macroeconomic erratics and stock market of Malaysia (Siahet al. 2014). The influence of macroeconomic variables on stock index futures plays an important factor that has an impact on the economy and the income of the individuals.

Background of the topic:

Malaysia is a developing country that is enhancing very swiftly after the country faced a massive financial crisis in the year 1997. In the recent years, the GDP of the country was forecasted to be $460 billion with a growth rate of 7% to 9% after 2009 and still continuing. The economy of Malaysia got strengthened after the year 2006, when the real gross domestic product was rising by 6% approximately.

The country faced crisis with respect to the commodity because of the oil crisis in the country that resulted to slowdown of the economy of Malaysia. The slowdown of the economy led to rise in prices increase in internal and external debts. The country launched various fiscal and monetary policies to rectify the problems related to the disparity in the economy. The main stock exchange of Malaysia is the Kuala Lumpur Stock Exchange and it comprises of the core board, a secondary board and KLCI (Mensiet al. 2014). This paper concentrates on the major index of Kuala Lumpur Stock Exchange and its stock index futures. The exchange was established to form a benchmark for the index of stock market, which would lead to efficient performance meter of the stock market for Malaysia and its economy. The exchange consists of more than one fifty organizations from the various sectors of the economy.

There were various transformations in the stock exchange of Malaysia after the financial crisis. The exchange gained high points after the year 2006 that was the beginning for the growth of the economy after the financial crisis. The reason for massive growth has been due to growth of the economy globally. The rise in the private consumption within the country boosted the Malaysian economy thereby leading to revitalization of the internal investment and growth of the export(Kuruppuarachchi. and Premachandra 2016).

The background of the topic tries to analyze the influence of macroeconomic variables on the stock index futures during the current time period and the suitable policies that can be taken in order to stabilize the economy. The variables that are macroeconomic in nature and that are considered for the study have a significant impact on the stock prices and the variables for the study includes exchange rate, supply of money and rate of inflation. There are various other variables that have an impact on the prices of stock but the current paper restricts its discussion on the above explained variables for the purpose of effective modeling and obtaining many variables may lead to loss of the level of freedom(Nordinet al. 2014). The paper has been structured in an organized way withtwo sections comprising of the scrutinizing various articles that has been framed with the related topic of macroeconomic variables and its influence on the stock index futures. The chapter three of the study explains the research methodology, hypothesis and the research strategies. Chapter four analyses the data and the variables selected for the study and chapter five provide the conclusion, recommendations and the future work that can be undertaken with respect to the research topic.

Statement of the Problem

In the current business environment, the stock exchanges play a significant role in the functioning of an economy. The role of stock exchanges is affected by the macroeconomic variables and the relationship between the two reveals the progress of the economy of Malaysia.

There have been researches that have been undertaken with respect to the same topic in various developed countries. However, on the same topic very few researches have been done by researchers analyzing the economy of a developing country. Some research papers have revealed that relationship and the influence of macroeconomic variables on thestock index futures have a significant effect on the economy of a country and there have been papers where researchers have argued against this relationship. An adverse effect on the stock exchange due to changes in the variables is seen to be the main problem for the progress of an economy. Malaysian economy has undergone various ups and down in the past few years(?endeniz-Yüncüet al. 2016). It had faced a massive financial crisis in the year 1997 and the country several years to climb out of such crisis. The paper has therefore, taken Malaysian economy as their domain because by analyzing the past financial performances of the country, researchers have claimed that the adverse economic condition has mainly been due to the changes in the relationship between the macroeconomic variables and the stock index futures. The study conducted a research on the various macroeconomic variables and came to a conclusion that out of all the variables there are a few variables that have an influence greater than the others. The paper therefore, will focus on these variables and will analyze them to discover the factors that influence the stock index future in the Malaysian market(Al-Majaliand Al-Assaf 2014).

This paper therefore, tries to find out the different issues and the problems that are confronted on the part of stock exchanges due to their relationship with the macroeconomic variables that has a significant impact on the daily transactions in the market.

Research Objectives

This paper attempts to utilize the commonly used analytical approach in understanding the stock index, namely the hypothesis of an effective market and to examine the influence of macroeconomic variables on the stock index futures. The specific aim of the paper is to examine whether the probability of the Malaysian stock market reveals the stronger form of effectiveness so that there is no relationship between the values of the transformation in the macroeconomic variables and the transformation in the stock index futures during a specified time period(Ouma, and Muriu 2014). However, in order to attain the objectives discussed above, the study aims to gather the particular objectives. They are discussed below:

The research objective includes examining the long-term relationship between the stock index futures with respect to the macroeconomic variables that includes the exchange rate, price index of the consumers, industrial production index, rate of interest and the money supply.

The other objective involves the short run causality among the stock index futures with respect to the macroeconomic variables that includes the exchange rate, price index of the consumers, industrial production index, rate of interest and the money supply(Mohammad Nor and Masih 2016).

There are certain general objectives that the study tries to ascertain like examining whether the Malaysian stock exchange reveals strong form of efficiency. The paper even tries to investigate the time of adjustment with regards to the long-run equilibrium that takes place in the Malaysian stock market. The paper even tries to evaluate the predicted feedback from the stock indexfutureswith respect to the macroeconomic variables(Ilahiet al. 2015). The paper even examines whether the financial crisis that occurred in the past has an impact on the trends with respect to the effectiveness of the Malaysian Stock market. The study tries to recommend various policy insinuations for developing the efficiency in the stock market.

Research Questions

The research questions comprise of the questions that will be useful for attaining the objectives of the research paper. The research questions are given below:

Is there a long run relationship among the macroeconomic variables and the stock index futures?

Is there short run causality between the macroeconomic variables and the stock index futures?

Research Hypothesis

The research hypothesis of the concerned paper is given as follows:

H₀: The relationship between the stock index futures and the macroeconomic variables has a significant effect on the economy of Malaysia.

H₁: the relationship between the stock index futures and the macroeconomic variables does not have a significant impact on the economy of Malaysia.

Scope of the Paper

The boundary of the paper is limited to the various variables that are macroeconomic in nature and the stock indexfuturesof the Kuala Lumpur Stock Exchange that affects the economy if the country. The paper even tries to understand the changes that have taken place in the economy after the adverse effects of the financial crisis.

Significance of the Study

The success of the paper can be identified by looking at the success of the Malaysian economy and the process by which the country as climbed up after facing an extreme financial crisis. The answer to the problem of the paper can be obtained with the support of well-planned plans and agendas and proper assignment of the resources by evaluating the variables and the indexes of the stock of the companies listed in the Kuala Lumpur Stock Exchange. The paper will reveal the specific influence and relationship between thestock index futures and themacroeconomic variables(Kabiret al. 2014). The study therefore, makes exercise of the knowledge that the researcher has and the knowledge from the stock exchange that will act as the literature for further future researches on the current topic.

Limitations of the Study

The paper is limited to the understanding of the researcher and the various professionals who have undertaken similar researchers with respect to various other countries. The paper has focused on some specific macroeconomic variables that mainly have an impact on the stock index futuresnamely inflation rate, rate of exchange and the money supply, interest rate, consumer price index etc(Narayanet al. 2014). However, there is scope of undertaking innovative tools so that better results can be achieved. The use of secondary data has been used for this paper as primary data may not be effective to find out the relevant answers. 

Literature Review

This segment of the paper gives an overview of the subsistent literature that is significant to the research paper questions. There have been various journals that have been reviewed to understand the relationship of the research problem. The association between the stock index futures and the macroeconomic factors is an important and well known topic for the researchers. The previous papers helps the new researchers to recognize, which are the macroeconomic factors that have an impact on the stock index futures that will be useful to undertake this research.

Stock Index Futures

Chenet al. (2016) examined the instability of the stock market with respect to the before and after the commencement of futures trading with the help of empirical analysis. The result indicates beginning of futures trading does not have an impact on the augmentation in stock price instability. Conversely, the implementation of the stock index futures agreements has developed the financial market, which has led to a stable stock market.

NikkinenandSahlström(2015) examined the FBMKLCI stock index futures. With the help of empirical analysis, the research reveals that there is immense instability in the market of stock index futures. The reason behind is the illiquidity of the concerned market because of a large amount of trade in a shorter time period and the other factor is that the survival of the stock futures market increases the flow of information, which speeds the main ingredient stock’s response of the newer information considerably.

The study published by Kurtzet al. (2014) reveals that conditions before and after the implementation of FBMKLCI index futures from earlier years were evaluated and compared. It is discovered that the implementation of the futures market does not raise the instability of the spot market, but provides the wavering fall in the spot market.

Miao, RamchanderandZumwalt(2014) examined the relationship between the Hang Seng Index and their futures for the past ten years. They regarded that the implementation of Hang Seng stock index futures had decreased the unsteadiness of the spot market.

In order to inspect the impact of stock index futures on the instability of the spot market, Stock and Watson(2016) utilized the data from various 20 countries where stock index futures had been introduced to undertake empirical studies. With the help of this study, it can be discovered that only very limited countries, the instability of the stock market may be pertinent to the implementation of the stock index futures; and in few others it is seen that the relevancy is not significant.

Bhardwaj, Gorton and Rouwenhorst(2015) even undertook a research on the enhancement of the stock index futures agreements. They explained the fact that the swift enhancement of the contracts is just a part as the investors want to restrict risk within their portfolios.

Exchange Rate

The exchange rate can be computed by making a comparison of the currencies of two different countries. It can be explained to be the ratio of one currency with respect to another currency. The association among the two variables has attracted the researchers and has even influenced the investors in predicting the future pattern of the stock market. There have been studies taken in the past that investigated the correlation among the stock index futures and the exchange rate and it is seen that the outcomes are not similar. It is seen that most of the researchers discovered that there is a negative relationship among the two variables.

According to Brooks(2014)FBMKLCI returns are affected by the instability of the dollar/ ringgit. The use of various GARCH frameworks was utilized to discover the outcome by making use of the data on a daily basis from 2006 to 2016. The result reveals that the appreciation of dollar and the stock market return have a relationship that is negative. It is described that when the dollar rises, products manufactured domestically becomes expensive with respect to the foreign products leading to rise in the import and fall in export. As a result the returns of FBMKLCI decrease.

Jebabli, Arouri and Teulon(2014) functioned the EGARCH model and discovered that the volatility of exchange rate is related inversely and negatively impact the return on the equity market. The rise in the international currencies depreciates the home currency and the return on the equity market rises for the long run. It is seen that during the short run, the return on the stock market decreases. The study undertaken by () found that the exchange rate has a negative impact on the equity market of Nigeria.

According to Mensiet al. (2014), they had performed the Engle-Granger co-integration test and discovered that the relationship of long-run equilibrium among the RMB exchange rate and the return on equity in China is non-existent by making use of the error of percent significant. However, transformations in the nominal exchange rate have an impact on the short run equity returns.

Another research undertaken by Ouma and Muriu(2014) shows that exchange rate Granger undertakes returns on stock and there is no inverse fundamentals from the return on equity with respect to the exchange rate. Their relationship is bidirectional in nature. Hamilton and Wu(2015) on the other hand discovered that sensitive index of Bombay Stock Exchange did not influence the exchange rate and vice versa as all previous information with respect to the exchange rate has been integrated in the stock market of India.

Stock and Watson(2016) make use of various models of regression to evaluate the impact of the rate of inflation, rate of interest and exchange rate in the Karachi Stock Exchange 100 returns by making use of 10 years information. The outcomes show that the rate of exchange and the price of the equity are correlated negatively. When the rate of exchange rises, the international investors transform their investment return into other currency. Thus, they will not invest and shift to any other investment.

Industrial Production Index

The Gross Domestic Product is known as the value of the total market of all the complete goods and services manufactured by a labor in any economy within a specific time period. It is a standard process to compute the national income of a country and the output for the economy within a time span.

The Industrial Production Index acts as an alternative for GDP and it reveals the rate of growth of the companies. Chenet al. (2013) mentioned that it is predicted to have a relationship that is positive among the Index of Industrial Production and the stock index futures. The positive relationship can be understood when there is a rise in the production leading to increased revenues and advantages of the firm and slowly expands the cash flow volume and thereby increasing the return on stocks. Irrespective of this factor, it is seen that the relationship among the return on equity and GDP is important. The discovery of the significant and positive relationship is continuous with the researches by Fang and You(2014). All these researches focus on the positive association among the two variables with the help of the estimated cash flow.

The growth of GDP tries to raise the return on stock as it stimulates growth of corporate profit with respect to the supply-side framework. The positive association between the growth of GDP and the average growth of earnings is aided by the Malaysian GDP and the corporate incomes for the last 20 years. The average growth of earnings will then change into the growth of EPS. It is not an assurance that all the growth earnings are due to the growth of the GDP that will lead to expansion of EPS. There are various reasons like new primary offerings to the public or issue of rights that will instigate the growth of GDP, which will not be accessible to the present investors. The growth of EPS will change to rise in the stock prices during the time when the ratio of price to earnings remains the same. However, rise in the stock prices will decrease returns from the future realized, which then becomes one of the challenges.

According to the study undertaken by Frankel(2014), the association among the per capita GDP and the real return on equity are negative for various countries that have been examined. The growth of GDP has been due to input factors that are bigger, which are raised rate of personal savings and rise in labor that does not profit the capital holders. The changes in the technology at a rapid pace are beneficial for the consumers by raising their living standard. Individual consumers try to conserve and invest more and this leads to increase in the real rate of wager that brings nil advantage to the owners of the capital. Thus, the GDP rise has very less impact on the stock index futures of a country.

Consumer Price Index

The Trading Economies show that the inflation rate of Malaysia is 2.50%. The Malaysian Department of Statistics published the rate of interest. Consumer Price Index is the alternative for rate of inflation. The sections of consumer price index in Malaysia consist of water, electricity, non- alcoholic beverages, fuels, gases and food. There was rise in the consumer prices of 1.4% from January 2005 to June 2015.

A significant rise in the degree of prices of services and goods in a country is definitely due to inflation. In another word, there is a fall in the real value of money, which reveals that the purchasing power in the exchange medium has reduced. When the standard price level increases, the consumers are reluctant to purchase higher units of services and goods as they have become expensive.

There have been various investigations on the correlation among the stock index futures and inflation. According to Naifar and Al Dohaiman(2013), inflation can be computed with respect to two variables. The various are inclusive of the transformation in the estimated inflation and the unexpected inflation. The previous statement reveals the difference among the real rate of inflation and the rate of inflation that is predicted while the latter tries to reveal the estimation of inflation with respect to other factors of economy. The analysis revealed that the variables of inflation have a negative impact on the stock index futures. Similar to this, Bodie, Kane and Marcus(2014) supports the negative impact and discovered that both the variables of inflation like the unpredicted inflation and the predicted inflation inversely affect the stock index futures in Korea. It is seen that various fundamental researches have shown that the stock index futures and the inflation have a negative association. The outcomes are similar with Roll, Schwartz and Subrahmanyam(2014) who discovered that inflation and stock index futures were negatively related by making use of the heteroscedascity integration to examine the long term association in the market of China. Furthermore, Chang, McAleerandTansuchat(2013) utilized the data from the BMS board to examine how the rate of inflation has an impact on the profit level of the associated companies. The negative correlation that have been discovered may lead to the information that the rate of organizations who are unable to pass on their price grows with the help of increased prices when the cost rises as well. All of these leads to a reflection of the stock index futures with the fall in the estimated cash flows and leads to decreased prices.

Furthermore, the research undertaken by Fernandes, Medeiros and Scharth(2014) shows that the actual operations and the stock index futures are associated positively but there exists a negative relation among the actual activity and inflation with the help of money demand theory.  Additionally, the inflation and the stock index futures are related negatively. Caldaraet al.(2016) even described that the model of dividend discount may clarify the inverse relationship among the stock index futures and inflation. Furthermore, according to Weale and Wieladek(2016) the outcome revealed that inflation indirectly has an impact on the stock index futures.

However, it is seen that the research undertaken by Khan(2014) revealed that there is a positive correlation inflation and return on equity. The model of ARIMA was introduced by Baker, Bloom and Davis(2016) to examine the impact of hyperinflation in Germany. The outcome of the study reveals that inflation and return on equity are related positively. The analysts concluded that the common stock instead of the stock index futures are used to hedge from inflation during this period.

Empirical studies undertaken by Asness,Moskowitz and Pedersen(2013) revealed that inflation negatively has an impact on the stock index futures revealing that equity instead of the stock index futures can be used to hedge for inflation.

Money Supply

M1, M2 and M3 are the segmentations that are in detail of the money supply. Money is found to be the most significant and liquid thing as it is the mode of exchange and can be used to pay off the debts. It is even seen that it is helpful in economizing the use of the limited resources that are devoted to the exchange. It can be utilized for trade facilitation, specialization and involvement towards the welfare of the community.

Money supply is a significant stock determinant of the prices of the stock as it plays a vital function to be a common indicator of the economic expectations. There are various analysis on the association among the stock index futures and money supply. It is seen that money supply can have an impact on the stock index futures either negatively or positively. According to Ibrahim and Musah(2014), the money supply and inflation are related positively to each other and an increase in the money availability would lead to the rise in the rate of discount and fall in the prices of the stock index futures. Narayan, Narayan and Thuraisamy(2014) discovered that inflation and money supply is related positively. However the two variables have a twin effect on the stock index futures. Firstly, a rise in the supply of money will lead to inflation and then gradually will raise the estimated rate of return. Nevertheless, according to KristjanpollerandMinutolo(2015) rise in the growth of money increases the stock index futures and the inflow of cash. Secondly, a rise in the supply of money and inflation will lead to the rise in the future cash flow of the organization, which leads to rise in the estimated dividend and will have an impact on the stock index futures prices.

By looking at the theories, negative impacts of money supply on the stock index futuresare discovered. The reason is that the rate of growth of money increases, it is forecasted that the rate of inflation will rise; gradually it will decrease the stock price. Therefore, it will eventually enhance the cash flows of the future and the price of the stocks. The analysis about the positive correlation between the stock index futures and the money supply is synchronized. It is discovered that there is a crucial positive relationship among the stock index futures and the money supply. It can be said that there is a rise in the supply of money it will lead to investors rebalancing their portfolio and will gradually result to rise in the stock index futures. This outcome is supported by Jurado, Ludvigson and Ng(2015).

The money supply includes M1 and M2. The measurements of M1 comprises of coins, account balances, cash and traveler’s analyzing their flow in the economy. On the other hand, the M1 variables and the deposit certificate, deposits of foreign banks and the account market of the money market are included in M2. M1 acts as an exchange medium and M2 acts as a store of value. M2 is is known for their wider money measure that is available. The broad supply of money that is M2, is explained as the as the overall amount of the monetary asset that is available in the economy.

According toBruno and Shin(2015), it is explained that the supply of money may have an impact of the stock index futures with the help of three processes. First, when the supply of money transforms, it could be associated with the unanticipated growth in the inflation and the uncertainties of future inflation and therefore, the inverse relationship is founded. Secondly, when the supply of money transforms, it could directly have an impact on the stock index futures by their effects on the operations in the economy. Finally, by relying on the theory of portfolio, it is recommended that there is a relationship that is positive in nature, which means that the rise in the available money may result to investment shifts from the money that does not bear interest to financial assets like equities.

Interest Rate

Interest rate acts as a significant macroeconomic variable that has a constructivecontact on the augmentation of the economy. In common, the rate of interest is known as the capital cost, which is known as the cost of opportunity of making a particular investment (Degiannakis, Filis and Kizys 2014). Interest rate cab be expressed in the view of the lender and the borrower. It is for the former that rate of interest is taken as the outlay of borrowing, which acts a fee for borrowing any debts or loans. It is seen for the latter that the rate of interest is known as the rate of investment, which means that the return that is earned by the lenders who provide money to the borrowers. When the rate of interest is given by the banks, the rate of depositor’s increases, people will look to endow in the banks more than in the stock market. Gradually, the individual do not asks for stocks and the prices for stock and stock index futures fall and vice versa(Bali, Brown and Caglayan 2014). Furthermore, if the rate of interest that is paid by the depositors to the banks increases, the rise in the rate of interest also result to fall in the investments and this is one of the factors that price of stock  index futures and stock prices will fall and vice versa. The increase in the rate of interest lends to the consumers who demand for deposits and the investment will decrease as the cost of borrowing is higher and therefore, decreasing the return of stock in the market. Therefore, in theory, there is antagonistic correlation that is existent in the stock index futures and the rate of interest.

According to Haddowet al.(2013), it is explained that there may be a key effect on the worth of the non-financial organization that is cause due to the changes in the rate of interest. With the respect to the above sentence, it is seen that under the model of present value, when the rate of interest increases, it tries to increase the cost of capital of an organization, which even means that the cash flow of the future is discounted as rate that is higher. Therefore, it influences negatively the value of shares of an organization. The rise in the fall in the rate of interest will increase the interest paid by the leveraged organizations and the consumers who have a higher debts will reduced their demand for services and goods and in another sense there will be fewer corporate revenues and it will have a negative impact on the stock index futures(KalyanaramanandTuwajri 2014). The rise in the fall in the rate of interest will have an effect on the cost of opportunity of the investments in the equity.  It is preferable to sustain the stocks when the rate of interest is high for the stock index futures and gradually the investors will balance their portfolios again by purchasing debts from the equity proceeds and thereby reduce the prices of stock index futures. Thus, all these effects abridged that variations in the rate of interest and the stock index futures returns is negatively related.

It is explained that before this crisis, the outcomes gained by the researchers DahlhausandVasishtha(2014) explained that the rise in the rate of interest and the exchange rate depreciation can be taken as a vital indicators for the economic and political instability and that leads to the unpredictability in the stock index futures. Additionally rate of interest can be a vital factor that unfavorably has an impact on the stock index futures. 

Impact of Futures Introduction on Underlying Stock market Volatility

The effect of the index futures implementation on the fundamental stock market instability is well analyzed and recorded; especially in the developed countries. It is seen that most of the studies discover little or no evidence in the rise in the stock instability with the introduction of futures. In the recent papers, Da, Engelberg and Gao(2015) examined the Ace market over a ten year period and discovered no incremental impact on the market instability due to the implementation of the stock index futures nor of the options. The outcomes appear to proof the results of Vejzagic and Zarafat(2013) who made use of daily and weekly returns for ACE market for a ten year period. Gargano and Timmermann(2014) investigated the Mid Cap index for discovering the instability transformation with the introduction of the futures contract within the index. It is seen that there is no proof of any rise in the volatility and their outcomes reveal a probable decrease in the fundamental instability.

Belgacemet al.(2015) discovered no crucial impact on the instability returns on the ACE market with the implementation of the futures contract. Belgacemet al.(2015) made use of the data for a period of over 12 years for FBMKLCI index and the Value Line Composite Index that investigates the transformation in the volatility with the implementation of the futures in the relevant indices. No evidence on the risen market instability was seen in the introduction of futures. However, on the contrary to the outcomes, Xie and Mo(2014) making use of the intraday daily open to close returns for a 20 year period reveals a higher instability in the ACE market with the introduction of FBMKLCI futures.

Relative Volatility

The instability in the futures is relative to the fundamental stock market and has been of a key issue to the analysts from the introduction of the stock index futures. Issahaku, Ustarz and Domanban(2013) investigates the comparative volatility making use of the natural logarithm of the closing prices that are seen on a daily basis for S&P 500 and NYSE.  During the six year study period; they discover that the volatility in the future will be higher. An analogous results is undertaken for a higher ten year period by Gambacorta, Hofmann and Peersman(2014). Making use of the amplified; Dickey Fuller and the Granger statistics, the researchers even discover that the instability in both the futures and the stock markets are highly tenacious and are forecasted on the previous innovations and the surprisingly steady correlation basis. Gambacorta, Hofmann and Peersman(2014) utilizes the volatility measures making use of the logarithm that are naturalof the open to open and the closes to close prices on the daily basis to analyze the FTSE 100 and the volatility futures. The researchers discover that the futures instability to be much higher. A related outcome is attained by the Bassettet al. (2014) for the Hong Kong’s Hang Seng Index and their futures contracts.

Futures Expiration Day Effect

The indications of an expiration day impact on the fundamental market instability looks to be a mixed one. The effects that are found appears temporary and very less indegree. There have been various studies that investigated the triple witchingdays in the market of US. It is seen that Gilbertet al.(2015) discover no indications of risen stock market instability on the expiration days of the futures. Lutz, Pigorsch. andRotfuß(2013) made use of non-parametric examinations provide suggestions of adverse movement of price on triple witching days. The outcomes are aided by Brunetti, Büyük?ahin and Harris(2016) who reveals a termination day effect for the S&P 500.

Srinivasan, Murthy and Al Hajiri(2016) discovers no impact on the expiration day on the FBMKLCI. He argues that this is due to the FBMKLCI futures contracts’ payments prices are computed on the basis of mid-morning and does not base on the price at the end of the day. Han, Kutan and Ryu(2015) come to an identical outcome for the Nikkei stocks and the futures contacts. They discover no proof of expiration day impact on the fundamental Nikkei index in Tokyo. Huet al. (2015) points out that this could be due to the flabbergasted dates of expirations and the utilization of various final payment of the prices. 

Evidence of Mispricing

 The futures contract can be mispriced if the prices moves from their fair value that are accustomed for net carrying costs. The presence of index arbitrage tries to keep the movements to the minimum level. However, various studies have discovered vital opportunities of arbitrage especially during the initial years of the contract. When they are rebalanced for the cost of transactions a lot of the mispricing looks to decline. Moreover, the indication of the current mispricing looks to be mainly due to the existence of the institutional restrictions, rules of uptick, and limitations on the arbitrage operations, prices of stales and the completion risk or mainly due to inertia that results due to traders who are inexperienced, inadequate volume or insufficient supply of the arbitrage capital.

Baum, Kurov and Wolfe(2015) discover vital underpricing for Nikkei Stock Index futures for over a period of two years. In approximately, 41% of the observations, underpricing was discovered more than the predicted transaction costs. The magnitude of the underpricing even though reduced with time. It is seen that a strong first order correlation is discovered in mispricing.  Wu and Xia(2016) duplicated the study but over a vast time period to bring in the Nikkei futures traded in Cunado and de Gracia(2014). Segregating the examinations into three sub periods, they discover underpricing in the primary sub period, very less mispricing is seen in period 2 and close consistent underpricing in the initial sub period, very less mispricing in period 2 and near reliable overpricing in sub period 3. The researchers make an argument that this mispricing transformations has a connection with the regulatory transformations in Japan.

Lead-lag Relationships in Returns in Volatility

There are various past studies especially of US markets that have revealed evidence of lead lag relations among the stock market and the futures. There are various factors that have been forwarded to describe the relationship. Out of these, there are uncommon trading of the stocks consisting the index; thus the index reproduce prices that are stale and therefore lags the futures(Castro 2013). The next case is the variations in the liquidness among the futures market and the stocks. There are knowledgeable traders who have inclinations to trade in a specific market and not in others depending on the information to seek that whether it is specific to the firm or is systematic and the lastly due to market resistances like the cost of transactions, requirements of capital and limitations of short-selling that may make it more prime to undertake trade in the futures market.

Surprisingly, the lead was not visible in the market of Japan. Tripathi and Seth(2014) investigated the Nikkei futures traded on SIMEX and the fundamental index in Tokyo over an interval of five minutes. By looking at the 20 day sample, they found that no indications of a lead-lag relationship is visible. The researchers argue that this may be due to the unimportant volume on the SIMEX comparative to the futures and the volume of cash market in Japan.

While the studies above show indications of a lead-lag association in the returns, the papers investigating the lead-lag relationship in price instability have discovered mixed outcomes. While Attari, Safdar and Student(2013) reveal no systematic trends in the S&P 500 for a two year period, Scotti(2016) discover that the volatility of S&P 500 futures prices led to a spot of approximately 15 minutes. The latter study had attuned for the stale prices and the GARCH impacts. Zhou(2014) discover proof of strength inter market connections in the instability.

By looking at the various papers, it shows that a lead-lag relationship in returns can be established even though a feeble evidence is seen in case of volatility. The relationship of instability looks to be more time modified.

Gaps

The analysis of the various studies undertaken by the several researchers is useful for the completion of the current research topic. However, there are several gaps that have been identified in the research papers that may have a significant impact on the completion of the paper. Therefore, these gaps are discussed by classifying in three segments(Büyük?ahin, B. and Robe 2014).

Contextual

With respect to the contextual aspect it is seen that various researchers have overlooked the other macroeconomic variables that has a relationship with the stock index futures. There have been few analysts who have compared the stock index futures of developed countries with the developing countries(Van Binsbergenet al. 2013). It is not an ideal method as both the country types have different economies and political structure that leads to different stock market.

Methodology

            It is seen that researchers in their papers have not properly explained the methodology they have undertaken in order to complete the paper. The influence of macroeconomic variables in the stock index futures are examined by analyzing the past and the present prices of the stock and the price indices and therefore any researches related to this topic is undertaken with the help of secondary data and through quantitative analysis as it would be the best method to undertake the research(Boons 2016). An explanatory design is prepared that helps the researchers to understand the influence of macroeconomic variables on the stock index futures. 

Conceptual and Hypothesis

Conceptual gaps are present as various researchers have undertaken various concepts in order to complete their studies. The use of various concepts have given various new ideas and knowledge that can be introduced in this paper to make the paper more precise and conclusive and can give better results.

The analysis of the various researches has helped to construct the hypothesis of the research. The hypothesis of the research has been given below;

H₀: Macroeconomic variables have a significant influence on the stock index futures of a country

H₁:Macroeconomic variables do not have significant influence on the stock index futures of a country   

Research Methodology

Introduction

This section explains the various steps of methodology, which are inclusive of the data explanation, processing of the data and data evaluation on the methodology that is utilized in the research paper. There are total five macroeconomic variables and the stock returns are taken as the variables that are dependent. These are the variables that are undertaken for the research. In order to compute the effects of the macroeconomic characteristics, time series information process will be exploited from the year of December 1990 to December 2016 on the monthly basis, therefore it is seen that there are more than 204 discoveries for the paper(Majid 2016). The variables are obtained from the database of KLCI and from the various banks in Malaysia.

Data Description

The paper makes use of the data gained from the time-series, which are from the year January 1990 to December 2016. The paper makes use of data that are monthly based as the method of sampling and thereby 204 observations are collected.

Data Processing

The data processing comprises of five steps that are undertaken for the research paper. The first step of the processing of the data is explaining the variables that are independent, which have used in the paper. These variables are gathered from the past researches undertaken by various researchers. The analysts gather the articles from the previous researches and discover the independent variables that are ideal for this paper. After taking the decision regarding the variables that are to be used, they gather the data about the independent and the dependent variables from the database data stream and from the various banks(Yeapand Lean 2014). The time and the size of the sample of the data are considered by the researchers too. The variables that are discovered from the database require be downloading and storing in a spread sheet. The researchers will mix and sort all the information that was collected to undertake the investigation. The next step involves the use of software, which is E-view 7.2. This software aids the researchers to initiate the investigations for analytic checking like the ARCH test, JarqueBera test, and others in order to discover whether the regression framework have any underlying issues. Finally, the researchers will bring out the outcome of E views 7.2 thereby undertaking the process of interpretation.

Regression Model

The regression model comprises of:

LOGKLCI_t=β₀ +β₁LOGEXC_t + β₂LOGIPI_t+ β₃LOGCPI_t + β₄LOGM2_t+ β₅IR_t + e_t

Where

LOGKLCI = Stock market return natural logarithm

LOGEXC = Exchange rate natural logarithm

LOGIPI = Industrial production index natural logarithm

LOGCPI = Consumer price index natural logarithm

LOGM2 = Money supply of category 2 natural logarithm

IR = Malaysia Government Securities for 3 month

Unit Root Test

According to Bahmani-OskooeeandSaha(2015), the inactiveness between of the model of regression among the independent and the dependent variables reveals that their variances are fixed and the average of the model of regression is found to be zero over the time. In a summarized way, if the time series is fixed the average and the variance remain constant for the whole time. If there are any problems that are non-stationary, there will be various other problems that will arise. The end result that has been predicted does not have the economic sense where there is no association among the variables as the R squares is very high. However, there are counterfeit outcomes among the unassociated variables of the model of regression. Therefore, it is significant to investigate whether the time series is fixed or moving. Therefore, ADF test and PP test are exploited to examine the fixed and the constant nature of the time series.

ADF Test

This test is done to investigate the data of the time series to discover whether they are mobile or fixed in order to run away from the bogus regression. Instead of it the ADF examination aids to establish the incorporation degree of the variable and rectify the serial correlation by adding the term differences that are insulated in order to gain the constancy of the variables. It is seen that the end results reveal that there is mobility within the time series information, the initial dissimilarity and secondary disparity of the capricious will be undertaken. By relying on the E-views results, there can be a comparison of the p-value and the significance level that are 1%, 5% and 10%. If the p-value is higher than the 1%, 5% and 10% level of significance, the test will not refuse the null hypothesis where the variable is mobile and contains a unit root. Therefore, the variables that had been examined have no process to evaluate the time pattern and pursue the haphazard saunter with waft. In the conclusion the initial differentiation of the variable can be undertaken. It is seen that ADF has an appropriate size but there are weak power of the possessions, and therefore Phillip Perron (PP) test is even undertaken in order to examine the constancy of the variables.

Philip Perron Test

Phillip Perron examination is similar to the ADF test where it is utilized to investigation of the constancy of the variables. It makes use of the non-parametric processes, which can aid the framework undergo lower from the problem of distribution and aids to manage the elevated regulation of the serial correlation. Therefore, Phillip Perron test can restrict the observation loss and limits from accumulating the insulate difference process that is implemented by ADF test. It is even seen that the outcome of the PP test usually will be similar to the ADF test. According to VejzagicandZarafat(2013), Phillip Perron test will rectify the error term in the serial correlation by changing the statistics of the testunswervingly. The null hypothesis (H0) will not be accepted if the p-value of the PP test is lower than (1%, 5% and 10%) of theimportance level. The null hypothesis that was not acceptedexplains that there is a constancy series between the variables.

Vector Error Correction Model

The VEC framework even known as the limited VAR is exploited with the help of the mobility series that requires being co-integrated. According to Javedet al.(2014) the model of VEC is the overall data utmost probability forecasting framework that permits investigating the co-integration of the variables without normalizing the variables. The framework of VEC has the ability to recognize the energetic progress among the independent and the dependent variables and process undertakes the alterations to reach the equilibrium that will be long run in nature. Therefore, it aids to restrict from undertaking the mistakes at the initial step to the secondary step. In a summarized form, the model of VEC will be implemented if co-integrationexistsbetween the variables in the long run equilibrium and long-run business. If co-integration does not take place, then the Granger test of causality will be undertakenwithout making use of the VECmodel.Furthermore, it is even seen that the model of VEC does not specify the previous estimations about the independent and thedependent variables that are existent within the model. It is even observed that the VECmodeldoes not have the capability to give out the vibrantcharacteristics of the total equation frameworkbetweenthe sample span. Therefore, the Impulse Response Function (IRF) and the Variance Decomposition Technique (VDC), which with the help of the VAR will be used to assess the required variables.

Co-integration Test

According to ChiaandLim(2015), co-integration test is undertaken to recognize the long run connection among the variables that are dependent and independent in nature. It aids to examine the set of the variables that are co-integrated or moves simultaneously. Co-integrated is fixed in the initial disparity and mobile during the level when the linear arrangement of the integrated variables is I (0).  It is seen that in order to perceive the co-integration among the variables the Johansen method can be undertaken.

Johansen Test (JJ Test)

Johansen Juselius test refers to a multi-dimensional addition where it permits the information consisting of one of more co-integrating motion to be implemented. This process is undertaken to investigate the relationship of co-integration by utilizing the VEC framework. It is even seen that the Johansen Juseliusexamination is done to recognize the relationship of co-integrationamong the variables that are existent in the long run. Mustafaet al. (2015), explains that if the variables aremobile and are not co-integrated, then the model of VAR will be utilized to examine the vibrant association of the short run between the variables. It is even seen that if the variables are co-integrated then the error co-integration model will be implemented.

The vectors of co-integration are helpful in recognizing the long-run association among the independent and the dependent variables. There exist two varieties of examining statistics namely maximal Eigen value and trace that helps to recognize the total number of the co-integrating vectors. By relying on the outcome of the E-view, there can be comparison between the significance level (1%, 5% and 10%) and the p-value of hint statistic examinations. It is seen that if the p-value is lower than the significance level of the hint statistics evaluation then the null hypothesis will be rejected as there exist co-integration among the variables.

Granger Causality Test

This examination process is undertaken to investigate the fundamental association between all the available variables. Thus, F statistics examination is engaged thereby to investigate the crucial relationship among the independent and dependent variables. Pradhanet al.(2014) stated that if co-integration does not exist in the Vector Error Correcting Model, then the test for Granger causality can be exploited to examine the fundamental connection between the variables. For instance, an example can be provided in this process that if B is discovered to be granger effected by A if A aids to forecast B. it is significant to establish a note of the statement that the granger of A causes B and it does not mean that b is an outcome of A. the test of Granger causality is exploited to compute the information substance and the primacy. This rest is even useful for understanding the fundamental crucial association between all the variables that are under consideration.

Impulse Resource Function

The process of Vector Auto Regressions (VAR) has introduced an innovative statistics, which is even known as Impulse Resources Function (IRF). This process is similar to the mechanism of Variance Decomposition that can be implemented only during the vibrant analysis for the short run. Furthermore, in order to predict in a more precise way regarding the variables, it is essential to construct a Impulse Resource Function with the help of the VAR. IRF is constructed to keep a track on the reactions when the process is impulse and shocked by the variances. Furthermore, the process of Impulse Resource Function can even be utilized to discover the arbitrary interface among the different variables.

Variance Decomposition

With respect to the Vector Error Correction Model (VECM), there exists vibrant evaluation in the short run, which is referred asForecast Error Variance Decompositions (FEVD). This decomposition model is a tool of econometrics to identify the arbitraryassociationamong the concerned variables(Al-ZarareeandAnanzeh 2014). Furthermore, Forecast Error Variance Decompositioncan even computethe compassionto any transformations in the estimation of the variables that are exploited. However, the process of Variance Decompositionhas the ability to investigate the comparativeinvolvementand the attributes towards innovationof the various variables that are used for the research.

Diagnostic Checking

Examination of Heteroscedasticity

This process reveals that there exists no steadiness in the variances related to the error term. According toAslam (2014), the process of heteroscedasticity is an infringement of the suppositions of the OLS. Although, problems in heteroscedasticity occur, the predictors of OLS remain linear and unbiased. The differences in the estimatorsofOLSwilllead to ineffective and biased. The process will over forecast or undervalue the actualdifference of the error term. Therefore, it has an impact on the actual assurance gaps and tests of hypothesis that is dependent on the distribution of T and F and that becomes improper and untrustworthy. Consequently, thepredictorsbecome ineffective. The model of ARCH can be exploited to discover whether the concerned model of econometrics can restrict the problem of heteroscedasticity to take place or not.  According to Barnor(2014), the model of ARCH refers to a style of framework that is suitable to study and investigate the economic issuesas heteroscedasticitythat actually occursduring the time series data.Therefore, the testing of hypothesis testing will form thereby to investigate the problem of heteroscedasticity within the economic framework. By relying on the E-view end result, the significance level and the p-value of the framework will be analyzed with each other. It is seen that if the p-value which is a probability then the Chi-Square of the ARCH examination is more or higher than the (1%, 5% and 10%) significance level of the framework, it tries not torefuse the null hypothesis (H0). Therefore, it can be explained that these framework of econometrics do not face any problem with respect toheteroscedasticity.

Auto Correlation Test

According to Bhunia and Ganguly(2015) the process of auto correlation is a problem of the economy that takes place due to the disruptions at a certain period that can have an impact on the results of the any other period. This process is a correlation among the series of the discoveries that either fall in the time series information or the data from the cross section. The autocorrelation issues are similar to the heteroscedasticity where the data are not BLUE anymore. There is a lack of effective minimum variances and therefore the differences of the OLS predictors and ineffective and biased. There are three various processes to identify the occurrence of the issues of autocorrelation of the framework that includes the Durbin Watson h test, Durbin Watson d test and the Breuch Godfrey examination that is even known as the LM test.

The Durbin Watson h test and d test are implemented to undertake the examination for the correlations that are of the first order(DahlhausandVasishtha 2014). There are implications of various predictions before the application of the investigation like the regression model does not have the lagged amount of the variables that are dependent and it should distributed normally with the error term. When the forecasts do not follow the h test then the process will be exploited to examine the regression model. Furthermore the researchers mainlyBreusch and Godfrey have constructed amechanism,known astheBreusch Godfrey (BG) test or better known as LM test to analyze the autocorrelation issues that has an autocorrelation of the highest order. By relying on the E-view results of the Breusch Godfrey LM test, if the p-value which is a probability and Chi-Square of the LM test is higher or more than the significance level (1%, 5% and 10%) of the framework, it looksnottorefuse the null hypothesis (H0). Therefore, it can be said that these tools of econometrics does not have anytimeseries correlation regarding any problem order.

JarqueBera Test

The distribution of normality regarding the error term is one of the conjectureswithin the regression model. The process of normality is significantas it can aid the examination of theconfidence and the significance interval to becomeauthentic. If normality of the error term is absent in the regression frameworkthen it tries to move the wrongpointsof the p-value for the total T-test and F test in the parameter of every model(Naifar 2016).Therefore, JarqueBera test is implemented to investigate the error term normality in the regression framework. JarqueBera test relies on the OLSoutstanding and vast sample examination.

The statistics of JarqueBera examination that estimates will be evaluated and a comparison will be made and thereafter the chi-square with 2 degree of freedom will be followed. Furthermore, by relying on the E-views results, it is determined that the normality is given out of the error term. If the p-value is greater than the significance level, then the null hypothesis will be accepted and a conclusion can be attained that the error term is distributed normally within the framework. 

Data Analysis and Findings

Introduction

This section of the research paper will evaluate the time series and the performance of the predicted outcomes about the impact on the macroeconomic variables on the stock index futures in Malaysia. Therefore, it comprises of the end results derived from the descriptive statistics, the co-integration examination, unit root tests, impulse response function, the granger causality test, the diagnostic checking and the variance decomposition evaluation.

Descriptive Statistics

Table 1: Descriptive Statistics

The above table reveals the synopsis of the explanatory information associated with thevariables of Malaysia economy in form of log. The aggregateLOGEXC is discovered to be 3.311321 during the time period. The rate of exchange goes down to the lowest of 2.506567 and to the highest of 4.144283 from 1990 to 2016. The standard deviation of the table is discovered to be.5252982, which reveals very low variations in exchange rate in comparison to the various other variables.

The aggregate of LOGIPI is 4.28and it is seen that the minimum and maximum amounts are 3.45833and 5.125each. The standard deviation is greater than the rate of exchange and comes to 0.6730063.

LOGCPI has an average of 2.43833 and the standard deviation of the return is 1.251792. The maximum amount comes up to 5.433333 while the minimum amount results to 0.65.

The aggregate of LOGM2 results to 12.94815, which is the utmost mean that is discovered with respect to all the independent variables that are available for this examination. The maximum amount for LOGM2 is 26.51667 and the minimum value comes up to 2.275 during specific time period. The standard deviation of the stock is 6.492516, which reveals minimum variations in the LOGM2 in comparison to the IR.

IR has a mean value of 4.619938 while the upper and the lower amounts of IR are 9.450833 and 2.07464 respectively, which are seen in the in June 2009 and April2002 respectively. By the observation of the maximum and the minimum values an idea can be attained that the progress of rate of interest is varies during the specified time period. Therefore, the standard deviation is always the highest between the entire variables and therefore, sums up to2.07464.

Unit Root Test

Result of Dickey-Fuller Unit Root Test

Table: 2: Dickey-Fuller Unit Root Test

Result of Philips-Perron Unit Root Test

Table 3: Philips-Perron Unit Root Test

With respect to the table 2 and table 3, there exists sufficient proof to decline the H0, the null hypothesis as it is seen that all the variables of p-values are lower than significance level of (10%, 5% and 1%). A conclusion can be attained that all the variables are fixed at I (1) and there is no existence of unit root within the model of regression.

Co-Integration Test

Table 4: Co-Integration Test

The table 4 that comprises of the data of the Co-Integration test reveals the outcome of the co-integration test. The end results reveal that the trace statistics is refused at r=2 during the 10% significance level while Max-Eigen statistics is declined at r=1 during the 10% significance level. Trace investigation is co-integrated within r=2 and Max-Eigen is co-integrated within r=1. Thus, the paper makes a conclusion that there exist a least of one co-integrating associations under the null hypothesis. 

Granger Causality Test

Table 5: Granger Causality Test

With respect to Table 5, it is seen that LOGKLCI has a significant effect on LOGCPI and LOGM2. The paper reveals that there is a significant amount of chi2 and the Granger test does not take into account LOGEXC and IR and LOGIPI as they have failed to pass the co-linearity test. Therefore, the values are given are with respect to LOGCPI and LOGM2 as they have passed the test along with LOGKLCI and it is seen that there is a significant amount of relation within them.

Variance Decomposition

Table 7: Variance Decomposition

With respect to table 7, the Malaysia return on stockthemselves explain theircomparative heterogeneitywith fevd level increasing from step 0 to step 10 discoveringself-variance that is illustrated by the help of their own creativity. Secondly, it has beenestablished that money supply has a manipulation power over the stock market return in Malaysiaduring every period. The highest effect that the variable money supply has on the stock market return in Malaysia is during the 10^th period.

It is seen that LOGKLCI has a definite relation with LOGCPI and LOGM2. It is seen by looking at the variance decomposition table that value of fevd has been increasing as the step moves from 0 to 10. However, the S.E value has remained stable as the value has hovered around 0.16 to 0.15. Therefore it can be said that the stock market grows during the long-run and that is discovered during the last few steps. The relation between the values during all the steps reveal that there exists a relation between the dependent and the independent variables.

Diagnostic Checking

Table 8: Diagnostic Checking

When referred to table 8, of the regression model, it is seen that the model has not been affected from problem of heteroscedasticity and auto correlation. Without this effect, the error term has been normally and commonly distributed. 

Discussion on the Crucial Findings

By looking at the end results,it is seen that VECMand Granger causality test discover that LOGCPI and LOGM2 are granger causedtoLOGKLCI at (10%, 5% and 1%) of the significance level correspondingly. It is seen that the GDP does not have an effect on the Granger cause stock return in the Malaysian market, and it is seen that this effect is not reliable with respect to this paper. There is no fundamental relationship between the industrial production and the stock market and in the other words; the variables cannot be used astheprincipalgauges to estimate each other.  The analysis of the data reveals that the rate of T-Bills in Malaysia are constructed with the help of KLCI. The data analysis examined the association among the volatility of the stock market and volatility in the macroeconomic variables in Malaysia. Therefore, it is seen thatstock return and money supply (M2) does not cause granger to one another. 

LOGEXC and LOGIPI do not cause granger to LOGKLCI by looking at the end results.  It was discovered that the rate of exchange does not granger becausethe stock return of Malaysia and the outcome is variable in accordance to the paper. It is seen that the rate of exchangeshould be asignificantreason that is to be reminded during the process of investment as the growing markets providesnumerous chances for investment among the stakeholders, which raises risk of the exchange rate. Furthermore, various empirical researchers even discovered that the path of causality does not have much weight. 

With respect to the Johansen co-integration examinations it is seen that the outcomes reveal there was proof that three co-integrating association vector in outline while with respect to the Max-Eigen Statistics, which reveals that only two co-integrating association vector are available. It is seen that the impulse response functions which evaluate the short run vibrant relation among the stock index futures in Malaysia and the macroeconomic factors that are available in the country. The end-result reveals that IR, LOGKLCI and LOGM2 have positive effects on LOGKLCI. It is seen that the feedback of LOGKLCI to LOGCPI discovers an obvious negative effect especially during the long duration.

The analysis of the secondary data that have been obtained in this research paper reveals that the null hypothesis (H₀) that have been framed in the paper is true when looking at the various examinations that have done with the help of the Unit Root Test, Co-Integration Test, Variance Decomposition etc. The alternate hypothesis (H₁) were found to be true in certain examinations but the results were not as significant as the null hypothesis. Therefore, it can be seen that macroeconomic variables have a significant effect on the stock index futures in the Malaysian market.

Additionally, diagnostic analysis is undertaken to analyze the auto correlation, heteroscedasticity and problem of normality in this paper. This model of regression does not contain autocorrelation and heteroscedasticity issues and the error term is distributed normally as well. 

Discussion, Conclusion and Implications

Introduction

This section of the paper comprises of the restrictions, recommendations and the implication of the study and the results that have been obtained from the earlier section.

Implication of the Study

In this research paper, the outcomes discover that variables like the consumer prices index and money supply have an equilibrium relationship which is long run with stock index futures in Malaysia. The other variables do not possess the same as they are collinear to the stock index futures. Furthermore, money supply and consumer price index are discovered to granger cause stock index futures in Malaysia. The outcomes discovered are vital especially to the investors in the stock market as they can exploit this data in undertaking decision making and can predict the progress of the stock market operating in Malaysia. Only the money supply and consumer price index that have been used in this study paper has a crucial role to play in manipulating the Malaysian Stock Market (KLCI). Therefore, this result contributes to support the makers of the policy and the participants in the stock market for a proper knowledge on how the Malaysian equity market can have an impact through these variables.

The outcomes reveal that the money supply has an impact on the stock index futures in the long run. When there is an appreciation in the Malaysian Ringgit, it reveals that there has been depreciation in the value of dollar and therefore, domestic commodities will become expensive with respect to the foreign commodities and therefore it will gradually lead to rise in import and the level of export will fall. It is due to this result that the stock index futures (KLCI) fall. The decisions should be undertaken cautiously on the completion of backward and the frontward monetary regulations for the intension to develop the performance within the stock market. Furthermore, the transformations in the supply of money will have an impact on the rate of exchange and gradually will motivate the stock market as well.

Additionally, the index of consumer price index has been discovered to granger cause the stock returns in Malaysia. It can simply be described in the sense that when the manufacturing rises, the benefits and profits for the firm will increase as well and therefore, rise in the cash flow volume will lead to the increase in the return on stock as well.

This can even conclude that there exist a long run association among the stock index futures and the consumer price index in Malaysia. Inflation reveals that there is a fall in the value of money. When there is a fall in the actual value of money, it will increase the power of purchase through the exchange medium as well. When there is a rise in the general level of price, the services and the goods tend to become expensive for the customers and therefore they will purchase lesser units. When there is inflation within the country, the living cost will increase due to the fact consumers may tend to use of less of goods and services that becomes expensive for them. The operations of the economies will be lowered as well. The investors would like to lower their rate of investment and thereby sell out their share thereby leading to decrease in the price of the share as well. Thus, in order to reduce the negative effects that are due to inflation, it is suggested that the government supervises and monitors the economic situations in a frequent basis and even to stabilize the supply of money in the market. When there are chances of inflation to initiate, proper actions and measures requires to be taken like limitations in the supply of money in the market etc.

Additionally, with respect to the results, it can be discovered that supply of money does the granger cause stock index futures in Malaysia. The operations of investment will rise when the supply of money increases as the investors look to gain more and more funds. Therefore, it develops the economic operations and the functions of the country as well. In order to raise the supply of money, the given reserve should be decreased so that higher degree of loans can be given to the public. In the open market activities, the government can even purchase treasury securities to raise the supply of money. Government requires putting more concern in introducing the monetary policy. The transformations in the supply of money will have an impact on the stock market as well.

Furthermore, it is discovered that rate of interest does not granger cause in the stock index futures in Malaysia. When there is a rise in the interest rates, the demand for deposits will rise and there will be lower investment as the borrowing cost becomes very high and consequently it lowers the stock index futures in market. It is seen that, it is ideal to dump the money in the financial institutions gaining interest income rather than undertaking investments in the stock market. The Central Bank undertakes the idea of controlling the rate of interest. The decision will have an impact on the stock market performance of Malaysia. When the rate of discount is reduced down by central bank, borrowing cost decreases as well and it will enhance the economic operations like investment in the stock market.

Limitations

This paper does not provide the data on the effects of issues on stock index futures on various other countries. The paper only makes examinations in Malaysia. The results and the outcomesrevealed are only helpful and supportive for the Malaysianstakeholders and makers of the policy in order to undertake decisions as the paper concentrates only in Malaysia. Various countries have variable status, background, cultures, political issues and power in the field of industry. Furthermore,variouscountries have various trends in thepathand the features of the data that are exploited. Thus, countries like Japan, China and United States are not recommended to undertake this sort of a research.

Recommendation

It is suggested to make use of various countries from the ASEAN countries like Japan and China within this research. Thus, it would be helpful for various other countries to submit to the research to approve the case study into the policies of their respective countries. It would even be supportive for the ASEAN countries and their policy makers and the investors and in making decisions. Thus, the investors can have a clear idea and develop the knowledge on the effects among the various countries as well.

Conclusion

Within a synopsis, a conclusion is prepared that shows that the outcomes with respect to this paper reveals that money supply and consumer price index do granger cause on the stock index futures of  Malaysia. Leaving these behind, the other macroeconomic variables is have equilibrium relationship that is long run with the stock index futures of Malaysia. There have been certain restrictions and recommendations have been discovered that aids the future researchers to make developments and contributions in future study and researches. The outcomes of the paper are helpful in developing better knowledge about the on the impact of these macroeconomic variables on the stock index futures in the Malaysian market.  

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