Oil price shocks, global economic policy uncertainty, geopolitical risk, and stock price in Malaysia: Factor augmented VAR approach

Figures & data

Table 1. Variation explained by the first and second principal components for each factor.

	IPI	INT	MS	EER	SM	REA
1st principal component	76%	78.7%	89%	69.8%	80.4%	70%
2nd principal component	16%	11%	10.2%	21.1%	12.5%	21%

Note: Based on orthonormal (normalized) loading and Bai and Na (2002) information creation.

Source: Authors' Calculation.

Table 2A. Unit root test results for global factor.

	Unit Root Test with PP			Unit Root Test with ADF
	With Constant	With Constant & Trend	Without Constant & Trend	With Constant	With Constant & Trend	Without Constant & Trend
Panel: At Level Form
GPR	−12.33***	−13.20***	−13.91***	−4.11***	−4.78***	−4.86***
GEPU	−8.10***	−8.37***	−10.53***	−4.97***	−5.26***	−5.15***
GDA	−10.29***	−2.55*	−2.39*	−10.24***	−2.969**	−2.51**
WOP	−10.22***	−3.67**	−2.80**	−10.17***	−4.67***	−3.93***
REA	−9.79***	−2.45*	−3.05**	−9.79***	−2.86*	−2.97**
Panel B: At First difference form (l(1))
GPR	−35.5***	−43.82***	−25.91***	−8.83***	−8.79***	−8.85***
GEPU	−14.28***	−18.37***	−11.53***	−8.15***	−8.23***	−9.04***
GDA	−2.99**	−3.41**	−3.04**	−2.89**	−4.03***	−2.92**
WOP	−8.53***	−8.49***	−8.23***	−8.56***	−8.52***	−8.25***
REA	−8.20***	−8.23***	−8.25***	−8.182***	−8.23***	−8.23***

Note: The optimal number of lags according to Schwarz information criteria (Maxlag = 11), where * and ** represent rejection of the null hypothesis at significance level of 1% and 5% for critical values of −3.291 and −2.71 with constant, −4.01 and −2.91 with a constant and trend, and −2.58 and −1.94 without constant and trend respectively.

Source: Authors' Calculation.

Table 2B. Unit root test results for sectoral indices.

	Unit Root Test with PP			Unit Root Test with ADF
	With Constant	With Constant & Trend	Without Constant & Trend	With Constant	With Constant & Trend	Without Constant & Trend
Panel: At Level Form
Construction	−6.15***	−6.77***	−6.99***	−5.60***	−6.36***	−6.56***
Consumer Product	−8.12***	−8.40***	−8.01***	−6.52***	−4.91***	−4.99***
Finance	−5.12***	−4.28***	−4.80***	−4.22***	−4.16***	−4.29***
Industrial Product	−5.73***	−5.34***	−5.72***	−5.64***	−5.30***	−5.88***
Industrial	−7.13***	−9.45***	−8.39***	−7.60***	−7.11***	−7.52***
Mining	−6.24***	−4.19***	−4.37***	−6.33***	−4.21***	−4.34***
Plantation	−4.88***	−3.89**	−3.97***	−4.79***	−3.89**	−4.18***
Property	−4.05***	−4.66***	−4.38***	−3.86***	−4.01***	−4.09***
Technology	−4.80***	−5.52***	−5.06***	−4.93***	−4.98***	−5.01***
Trade Services	−6.02***	−6.06***	−6.25***	−6.44***	−6.37***	−6.44***
Panel B: At First Difference Form (l(1))
Construction	−10.70***	−10.63***	−10.65***	−10.70***	−10.63***	−10.65***
Consumer Product	−11.03***	−12.74***	−10.39***	−10.93***	−5.87***	−10.39***
Finance	−8.80***	−8.99***	−8.67***	−8.80***	−9.01***	−8.67***
Industrial Product	−10.21***	−10.22***	−9.97***	−10.21***	−10.18***	−9.97***
Industrial	−13.95***	−14.22***	−13.24***	−12.56***	−12.51***	−12.46***
Mining	−10.41***	−10.50***	−10.37***	−7.53***	−7.17***	−7.61***
Plantation	−8.45***	−8.54***	−8.42***	−8.45***	−8.54***	−8.41***
Property	−8.95***	−9.10***	−8.95***	−8.93***	−9.11***	−8.93***
Technology	−9.98***	−10.59***	−9.63***	−9.87***	−10.08***	−9.63***
Trade Services	−10.70***	−10.63***	−10.65***	−10.70***	−10.68***	−10.64***

Note: The optimal number of lags according to Schwarz information criteria (Maxlag = 11), where * and ** represent rejection of the null hypothesis at significance level of 1% and 5% for critical values of −3.291 and − 2.71 with constant, −4.01 and −2.91 with a constant and trend, and −2.58 and −1.94 without constant and trend respectively.

Source: Authors' Calculation.

Figure 1. Reponses of Malaysian stock market to one-standard deviation of different global shocks. The confidence bands are based on a 95% significance level and constructed from Monte Carlo simulations based on 2,500 replications.

Table 3. Variance decomposition of global factor.

Month	Std Error	GPR	GEPU	WOP	GDA	REA	Month	Std Error	GPR	GEPU	WOP	GDA	REA
Panel A: Variance Decomposition of GPR							Panel B: Variance Decomposition of GEPU
1	0.13	100	0	0	0	0	1	0.08	0.22	99.78	0.00	0.00	0.00
3	0.13	100	0	0	0	0	3	0.08	2.36	96.64	0.30	0.02	0.68
6	0.13	100	0	0	0	0	6	0.09	5.83	83.73	2.01	3.90	4.53
12	0.136	100	0	0	0	0	12	0.09	6.61	82.00	2.28	4.27	4.84
18	0.136	100	0	0	0	0	18	0.09	6.79	81.66	2.28	4.38	4.89
24	0.13	100	0	0	0	0	24	0.09	6.79	81.59	2.28	4.42	4.91
Panel C: Variance Decomposition of WOP							Panel D: Variance Decomposition of GDA
1	0.01	1.94	0.33	97.73	0.00	0.00	1	12.16	0.66	0.66	1.68	96.99	0.00
3	0.01	1.92	0.59	90.19	0.04	7.26	3	22.36	0.50	1.86	0.86	96.48	0.29
6	0.01	4.24	3.18	80.04	2.09	10.45	6	27.37	1.67	11.69	0.61	84.61	1.42
12	0.01	4.66	4.30	77.60	2.93	10.51	12	29.66	1.79	14.00	0.66	81.78	1.76
18	0.01	4.78	4.29	77.36	3.05	10.53	18	30.94	1.65	14.94	0.66	80.63	2.12
24	0.01	4.78	4.29	77.35	3.05	10.53	24	31.55	1.59	15.31	0.67	80.16	2.27
Panel E: Variance Decomposition of REA
1	0.06	0.00	5.83	3.90	4.08	86.19
3	0.14	0.30	3.92	11.92	4.61	79.25
6	0.19	0.84	7.18	17.40	6.77	67.81
12	0.26	0.56	13.89	17.51	21.30	46.75
18	0.32	0.38	17.04	13.82	30.96	37.80
24	0.36	0.29	18.78	11.88	36.25	32.79

Note: All numbers are in percentage form.

Source: Authors' Calculation.

Table 4. Variance decomposition of stock market prices due to structural factors.

Step	Std Error	GPR	GEPU	WOP	GDA	REA	IPI	INT	MS	EER	SM
1.00	0.59	0.01	3.77	14.29	0.50	1.88	4.81	0.16	0.69	3.42	70.46
3.00	0.79	14.16	5.25	6.38	10.91	4.04	7.80	1.09	4.90	2.20	43.06
6.00	1.75	13.02	6.22	12.82	6.73	7.52	5.44	0.94	6.55	1.10	38.94
12.00	2.41	9.30	2.69	12.71	30.01	5.48	6.10	1.74	5.44	0.73	25.20
18.00	3.60	7.09	11.94	12.70	24.15	12.32	3.95	7.02	5.03	0.34	15.06
24.00	4.30	6.83	14.58	13.97	17.37	18.02	3.82	7.91	5.10	0.27	11.82

Note: all numbers are in percentage form.

Source: Authors' Calculation.

Figure 2. Sectoral responses to one-standard deviation of geopolitical risk shocks. The confidence bands are based on a 95% significance level and constructed from Monte Carlo simulations based on 2,500 replications.

Figure 3. Sectoral responses to one-standard deviation of global economic policy uncertainty shocks. The confidence bands are based on a 95% significance level and constructed from Monte Carlo simulations based on 2,500 replications.

Figure 4. Sectoral responses to one-standard deviation of oil supply specific shocks. The confidence bands are based on a 95% significance level and constructed from Monte Carlo simulations based on 2,500 replications.

Figure 5. Sectoral responses to one-standard deviation of oil demand shocks due to global economic activity. The confidence bands are based on a 95% significance level and constructed from Monte Carlo simulations based on 2,500 replications.

Figure 6. Sectoral responses to oil demand specific shocks. The confidence bands are based on a 95% significance level and constructed from Monte Carlo simulations based on 2,500 replications.

Table 5. Variance decomposition of sectoral stock prices due to shocks in global factor.

Month	Std Error	GPR	GEPU	WOP	GDA	REA	Month	Std Error	GPR	GEPU	WOP	GDA	REA
Panel A: Variance Decomposition of Construction							Panel B: Variance Decomposition of Consumer Product
1	0.04	22.80	5.88	5.79	1.37	11.58	1	0.02	0.01	9.07	4.06	0.05	1.33
3	0.05	16.27	9.97	11.84	1.76	11.23	3	0.03	2.42	7.86	6.18	0.08	1.19
6	0.06	15.52	10.00	11.97	5.16	10.49	6	0.03	2.41	7.92	6.16	0.08	1.20
12	0.06	15.44	10.93	11.98	6.28	10.23	12	0.03	2.40	7.92	6.13	0.09	1.25
18	0.06	14.67	10.87	12.50	7.19	10.14	18	0.03	2.38	7.90	6.13	0.22	1.44
24	0.03	0.98	2.10	10.56	0.00	4.60	24	0.03	2.36	7.87	6.11	0.58	1.71
Panel C: Variance Decomposition of Finance							Panel D: Variance Decomposition of industrial
1	0.03	0.05	8.61	5.72	1.38	0.28	1	0.03	0.65	7.76	4.12	0.59	0.11
3	0.03	2.79	8.32	10.69	1.53	0.24	3	0.03	1.15	6.53	4.83	0.53	0.10
6	0.03	2.76	8.27	10.58	1.75	0.30	6	0.03	1.32	6.51	4.82	0.57	0.25
12	0.03	2.75	8.26	10.56	1.78	0.35	12	0.03	1.32	6.47	4.83	0.63	0.31
18	0.03	2.72	8.21	10.52	1.79	0.86	18	0.03	1.32	6.44	4.82	0.70	0.32
24	0.03	2.68	8.15	10.46	2.07	1.70	24	0.03	1.32	6.43	4.82	0.71	0.35
Panel E: Variance Decomposition of Industrial Products							Panel F: Variance Decomposition of Mining
1	0.03	0.13	8.10	1.16	0.07	2.36	1	0.11	2.00	3.06	0.26	0.58	0.43
3	0.04	8.54	9.46	3.40	0.07	1.87	3	0.11	4.45	3.21	0.84	1.26	1.07
6	0.04	8.43	9.50	3.43	0.07	1.85	6	0.11	4.42	3.24	0.92	1.55	1.31
12	0.04	8.36	9.49	3.41	0.08	1.99	12	0.11	4.39	3.24	0.97	1.60	1.39
18	0.04	8.29	9.46	3.44	0.20	2.39	18	0.11	4.38	3.24	0.97	1.60	1.39
24	0.04	8.20	9.42	3.47	0.58	2.86	24	0.11	4.38	3.24	0.97	1.61	1.40
Panel G: Variance Decomposition of Properties							Panel H: Variance Decomposition of Plantation
1	0.05	0.36	10.80	0.31	0.06	2.50	1	0.03	0.01	8.47	0.22	2.60	1.09
3	0.05	8.40	9.48	0.98	0.54	2.16	3	0.03	0.39	7.52	0.30	8.64	1.10
6	0.05	8.28	9.63	1.00	0.83	2.16	6	0.04	0.60	6.69	0.28	13.41	0.97
12	0.05	8.20	9.62	1.06	0.98	2.29	12	0.04	0.65	6.39	0.28	17.63	0.82
18	0.05	8.17	9.62	1.09	0.98	2.41	18	0.04	0.60	6.51	0.37	19.17	0.79
24	0.05	8.15	9.61	1.11	1.06	2.49	24	0.05	0.52	6.65	0.55	19.47	1.00
Panel I: Variance Decomposition of Technology							Panel J: Variance Decomposition of Trade-Service
1	0.07	0.10	2.67	1.23	5.65	0.82	1	0.03	0.16	8.09	1.25	0.55	0.56
3	0.07	2.57	3.11	2.49	5.21	1.31	3	0.03	2.54	8.53	2.67	0.58	0.50
6	0.07	2.52	3.04	2.59	5.25	1.52	6	0.03	2.51	8.63	2.64	0.62	0.50
12	0.07	2.49	3.01	2.56	5.42	1.54	12	0.03	2.50	8.65	2.64	0.64	0.58
18	0.07	2.48	2.99	2.56	5.41	1.82	18	0.03	2.48	8.63	2.66	0.73	0.80
24	0.07	2.47	2.98	2.59	5.40	2.24	24	0.03	2.47	8.59	2.68	1.03	1.06

Note: all numbers are in percentage form.

Source: Authors' Calculation.

Figure 7: Reponses of Malaysian stock market price to one-standard deviation of different global shocks with different lag (7 lags). The confidence bands are based on a 95% significance level and constructed from Monte Carlo simulations based on 2,500 replications.

Figure 8. Reponses of Malaysian stock market price to one-standard deviation of different global shocks with recursive identification. The confidence bands are based on a 95% significance level and constructed from Monte Carlo simulations based on 2,500 replications.

Appendix A1. Variable description

	Global factors	Source
GPR	GPR refers to geo-political risk which captures paper-based scores on political uncertainty, war, and terrorist attacks. Higher value of GPR index indicates high geo-political uncertainties.	http://www.policyuncertainty.com.
GEPU	GEPU denotes global economic policy uncertainty which captures paper-based scores on economic policy related uncertainty. Higher value of GEPU index is indicative of high global economic policy uncertainty.	http://www.policyuncertainty.com.
WOP	WOP is world oil production which captures monthly global oil production.	EIA website
GDA	GDA is global economic activities index that captures global shipment activities.	Kilia ‘s website
REA	REA is real crude oil price.	DataStream
Domestic factors
IPI	IPI represents industrial production index of Malaysia which captures information of 20 sectorial production indices.	Refer to Appendix A2
INT	INT is interest rate factor which contains information of 14 different types of interest rates. Interest rate is one of the main tools of monetary policy.
MS	MS is Money supply of Malaysia. This factor captures of 7 different types of money supply related information
EER	EER is Exchange rate of Malaysian ringgit against the world’s dominant currencies.
SM	SM denotes stock market which captures information of 17 different indices in the Malaysian stock market.

Appendix A2. Description of data series.

SERIES ID	DESCRIPTION	SERIES ID	DESCRIPTION
PANEL A: STOCK MARKET		PANEL B: INTEREST RATES
SM1	FTSE BURSA MALAYSIA (1977 = 100)	INT1	SHORT-TERM INTEREST RATE – KLIBOR 3 MONTHS (% PER ANNUM)
SM2	FSTE TOP 100	INT2	SAVING DEPOSIT RATE (% PER ANNUM)
SM3	FSTE SMALL CAP	INT3	SAVING DEPOSIT RATE – COMMERCIAL BANKS (% PER ANNUM)
SM4	FSTE MID 70	INT4	BANK NEGARA MALAYSIA OVERNIGHT POLICY RATE (OPR) NADJ
SM5	CONSTRUCTION SECTOR INDEX	INT5	BASE LENDING RATE – COMMERCIAL BANKS (% PER ANNUM)
SM6	FINANCE SECTOR INDEX	INT6	TREASURY BILLS: 3 MONTHS (% PER ANNUM)
SM7	OF INDUSTRIAL SECTOR INDEX	INT7	TREASURY BILLS: 6 MONTHS (% PER ANNUM)
SM8	INDUSTRIAL PRODUCT SECTOR INDEX	INT8	TREASURY BILLS: 12 MONTHS (% PER ANNUM)
SM9	MINING SECTOR INDEX	INT9	GOVERNMENT SECURITIES YIELD: 10 YEARS (% PER ANNUM)
SM10	PLANTATION SECTOR INDEX	INT10	COMMERCIAL BANKS: FIXED DEPOSITS - 1 MONTH NADJ
SM11	PROPERTY  SECTOR INDEX	INT11	COMMERCIAL BANKS: FIXED DEPOSITS - 3MONTH
SM12	TECHNOLOGY SECTOR INDEX	INT12	COMMERCIAL BANKS: FIXED DEPOSITS - 6 MONTH NADJ
SM13	TRADE & SERVICES SECTOR INDEX	INT13	COMMERCIAL BANKS: FIXED DEPOSITS - 9 MONTH
SM14	CONSUMER PRODUCT SECTOR INDEX	INT14	COMMERCIAL BANKS: FIXED DEPOSITS - 12 MONTH
SM15	FTSE BURSA MALAYSIA EMAS SHARIAH	PANEL C: INDUSTRAIL PRODUCTION INDICES
SM16	FTSE HIJRAH SHARIAH	IPI1	IMPORTS (2010 = 100)
SM17	MORGAN STANLEY CI	IPI2	MINNIG (2010 = 100)
PANEL C: EXCHANGE RATES		IPI3	WATER SUPPLY (2010 = 100)
EX1	FOREX: UNITED STATES (MYR/USD)	IPI4	MANUFACTURING (2010 = 100)
EX2	FOREX: UNITED KINGDOM (MYR /GBP)	IPI5	ELECTRISITY AND GAS (2010 = 100)
EX3	FOREX: EURO (MYR/EUR	IPI6
EX4	FOREX: JAPAN (MYR/JPY)	IPI7	CHEMICALS (2010 = 100)
EX5	FOREX: SINGAPORE (MYR/SGD)	IPI8	FOOD (2010 = 100)
PANEL D: OIL PRICES		IPI9	FISHING AND AQUACULTURE (2010 = 100)
OP1	KO DUBAI SPOT PRICE OF CRUDE OIL (US$/BBL) CURN	IPI10	BEVERAGE & TOBACCO (2010 = 100)
OP2	BRENT CRUDE OIL AVERAGE SPOT PRICE	IPI11	CRUDE MATERIALS, INEDIBLE (2010 = 100)
OP3	WTI CRUDE OIL AVERAGE SPOT PRICE	IPI12	MACHINERY & TRANSPORT EQUIPMENT (2010 = 100)
PANEL D: MONEY SUPPLY		IPI13	MINERAL FUELS & LUBRICANTS (2010 = 100)
MS1	M0: CURRENCY IN CIRCULATION (EP)	IPI14	ELECTRICAL EQUIPMENT
MS2	MONEY SUPPLY – M1 (MYR MN)	IPI15	LOCAL PRODN-MFG.OF COMPUTER, ELECC AND OPTICAL PRDS
MS3	MONEY SUPPLY – M2 (MYR MN)	IPI16	LOCAL PRODN. - MFG. OF RUBBER AND PLASTIC PRODUCTS
MS4	MONEY SUPPLY – M3 (MYR MN)	IPI17	CONSUMPTION GOODS - OTHER CURN
MS5	MONEY SUPPLY: BROAD QUASI MONEY - FIXED DEPOSITS (EP) CURN (MYR MN)	IPI18	CONSUMPTION.GOODS-CONSUMER GOODS & DURABLES CURN
MS6	RESERVE MONEY – TOTAL (MYR MN)	IPI19	CONSUMPTION GOODS - PRIMARY FOOD & BEVERAGES CURN
MS7	EXTERNAL RESERVE – GROSS INTERNATIONAL RESERVES (MYR MN)	IPI20	ELECTRICITY: LOCAL CONSMPTN-INDL., COMMERCIAL & MINING NADJ

Note: all series are transformed into stationary forms and series are extracted from DataStream. Seasonality in series are adjusted by employing ARIMA X13.