The Effect of Oil Price Fluctuations on the Malaysian and Indonesian Stock Markets

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Abdul Razak Abdul Hadi
Mohamed Hisham Yahya
Abu Hassan Shaari

Abstract

This study is pursued with the objective of examining the effect of changes
in crude oil price on the share prices of public listed companies on Bursa
Malaysia and the Jakarta Stock Exchange as proxied by the Kuala Lumpur
Composite Index (KLCI) and Jakarta Composite Index (JCI), respectively.
The study employs the Engle-Granger Cointegration test and Error
Correction Modelling (ECM). Using time series data from January 1986
through December 2006, this study finds a significant long-term relationship
between the movement of crude oil price and the performance of the two
stock markets. The two observed variables in both stock markets are also
found to be positively correlated. The test results from Impulse Response
Function and Variance Decomposition show the presence of a dynamic
interaction between the movement in crude oil prices and the two stock
market indices.

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