Impact of Macroeconomic Indicators on Stock Market Performance: Evidence from Kuala Lumpur Composite Index (KLCI)

Nor Izzati Mohd Aziz; Putera Abid Juzairi; Muhammad Ahmad Dost

Authors

Nor Izzati Mohd Aziz Department of Accounting and Finance, Faculty of Business Management and Professional Studies, Management and Science University (MSU), University Drive, Off Persiaran Olahraga, Section 13, 40100 Shah Alam, Selangor, Malaysia
Putera Abid Juzairi Department of Accounting and Finance, Faculty of Business Management and Professional Studies, Management and Science University (MSU), University Drive, Off Persiaran Olahraga, Section 13, 40100 Shah Alam, Selangor, Malaysia
Muhammad Ahmad Dost Department of Accounting and Finance, Faculty of Business Management and Professional Studies, Management and Science University (MSU), University Drive, Off Persiaran Olahraga, Section 13, 40100 Shah Alam, Selangor, Malaysia

Keywords:

Stock market performance, macroeconomic variables, money supply, Consumer Price Index, exchange rate, Malaysia, emerging market, Kuala Lumpur Composite Index

Abstract

This study examines the dynamic impact of macroeconomic shocks on stock market performance in Malaysia, using the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBMKLCI) as a proxy for overall market activity. Employing monthly time-series data from January 2015 to December 2024, the analysis focuses on three key macroeconomic indicators: money supply (M2), consumer price index (CPI), and the MYR/USD exchange rate. A Vector Autoregression (VAR) framework is utilised to capture the endogenous and time-varying interactions among these variables. The results reveal that money supply shocks exert a positive and statistically significant effect on stock market returns in the short run, supporting the liquidity effect hypothesis. In contrast, inflation and exchange rate depreciation have significant negative impacts on market performance, reflecting increased uncertainty, higher discount rates, and capital flow volatility. Impulse response functions confirm that macroeconomic shocks have both immediate and persistent effects on stock returns, while forecast error variance decomposition indicates that monetary conditions are the dominant macroeconomic driver of stock market volatility over longer horizons. The findings highlight the importance of money supply, inflation, and exchange rate movements in sustaining stock market performance in an emerging economy. These results offer valuable insights for policymakers and investors seeking to understand and manage the effects of macroeconomic disturbances on financial markets in Malaysia.