The impact of oil price on the Malaysian economy

Abstract

This paper studies the impact of oil prices; the world oil price (PW) and the domestic oil price (PD), on output and financial markets in Malaysia, The analyses are conducted at both aggregate and disaggregate levels within the VAR and the Augmented-CAPM frameworks. The results from the aggregate analysis indicate change in oil prices affect the output market significantly both in the short run and long run. Moreover, the significant relationship between the two variables is also documented in the asymmetric test. At disaggregate level, significant results of the vector error correction model (VECM) test are documented in the Agriculture, Forestry and Fishing (AGR), Mining and Quarrying (M1N), Construction (CONS), and Wholesale and Retail Trade, Hotels and Restaurant (WSALE) sectors of the PW and/or the PD analyses. These findings provide indication that the sectors are positively associated with change in oil prices in the long run. From the causality test, significant result is identified in the MIN sector only. From these findings we may conclude that the most pronounce result is documented in the MIN sector where output and the oil price variables are detected to associate significantly not only in the short run but also in the long run. For the financial market, the aggregate analysis documents insignificant results in all tests. This finding provides evidence that the stock price (SP) is relatively insensitive to change in oil prices. At disaggregate level, a unique significant result, which is obtained from the asymmetric model, is detected in the industrial (IND) sector. In particular, the returns of the IND sector are negatively exposed and are asymmetrically associated with change in the PW oil price. The overall findings of the two market analyses lead us to conclude that, the output market is more reactive to oil price change than the financial market.