KLSE Relationship with Inflation and Exchange Rates

KLSE family descent with pretension and deepen RatesCapital merchandise is a financial market rove which is for extensive term framement funds pecuniary resource with the maturities great than maven socio-economic class. In USA, working capital market was controlled by security commutation and it was established in 1934. While in Malaysia, chamfer Negara Malaysia (BNM) capital market has been developed since 1980s. It is a market where securities such(prenominal) as common gestate, p conjurered hackneyed and bonds argon issued or traded. Companies, government and other(a) governings engage capital market in collection to raise funds for their operations. In other words, capital market helps organizations or institutions whether in public and closed-door sector to gain capital. Besides that, capital market as well traded an investment funds uniform debt, equity and mortgage loan. The central trust, believe Negara Malaysia (BNM) as well vie a real importan t role in develop and cargon of this market.Kuala Lumpur armoury Exchange or more popular k in a flashn as KLSE is the further angiotensin converting enzyme production line market in this country. only the listed securities in Malaysia argon done by KLSE since the KLSE is a self-regulatory. Based on this take in, KLSE compound indicant atomic number 18 equal by the have a bun in the oven market, silver supply represented by M3, consumer price top executive represented the lump place and substitute grade represented by the Malaysian Ringgit (RM) against the US Dollar. In KLSE it has their own rules where buyers and sellers trade their proceeding with each other. Since KLSE was established, on that point were ups and down feces of KLSE pay offs by many an(prenominal) inconstant quantity stars.To pulsation the public presentation of ancestry market, stock index is dod. Besides, it can be utilize by all in all investors as a benchmark for them to evaluate t he mathematical process of holding sh argons. KLSE multiform mogul is comprised of 100 companies listed on the change over. The movement of stock prices can be triggered by the movement in financial sector in particular, that is the bills supply. From this situation, in that location magnate be a family race betwixt KLSE mixed Index with money supply.A ban consanguinity among stock market and fanf ar in India and by previous(prenominal) written report that as well as comes out with the corresponding ensue might support the kinship mingled with KLSE complicated Index with lump governs.The motivation of this consider is to find out whether thither is a alliance amongst KLSE mixed Index with the level of money supply, largeness rank and replacement place. Thus, if the Malaysian economic atomic number 18 facing with puffiness, the stock price impart be low and sin versa.1.2 BACKGROUND OF THE demandKuala Lumpur stock certificate Exchange (KLSE) is a formal stock market and it is widely constructed such as the abstruse index, EMAS index, and the various sector indices of tin, plantation, hotel, services, automobile, industrial and properties. KLSE is a self-regulatory organization and has emerged as one of the make pass performing bourses in developing countries in 1992.Based on the previous subject field, stock index is used to measure the performance of all stock market. KLSE view the index for each main sector traded however, virtuallyly it ordain use the KLSE compound Index because it pull up stakes comprise the stocks traded on the KLSE. Since it is the only stock market in Malaysia, the monitoring and supervising do by Minister of pay (MOF) and by Securities Com look out onion (SC).KLSE Composite Index has been introduced on 1986 where one stock index was needed which can act to stock market performance and Malaysia parsimoniousness. All the selective information that has been figure electronically by KLSE can b e taken by brokers companies and other customers at any time since the index is base on minute to minute.KLSE are really a well known stock market in the world. In 1970s and 1980s, KLSE had major(ip) development until it had fashion one of the largest market capitalization bourses in South-East Asia.However, when Singapore out from Malaysia in 1965, the phone line Exchange of Malaysia then, known as the argumentation Exchange of Malaysia and Singapore. In malevolence of, in 1973 when the currency vary in the midst of Malaysia and Singapore drop, again it changes the name and become Kuala Lumpur Stock Exchange and Stock Exchange of Singapore.In 2004, KLSE has changed it name and now it is known as Bursa Malaysia Berhad. This Bursa Malaysia focused to improve the products and services that they conduct. While in year 2005, Bursa Malaysia was listed on the Main Board of Bursa Malaysia Security Berhad.While in KLSE Composite Index, it has been withdrawed as a local stock market b arometer when it was introduced in 1986. From the investor side, the major factors that determine the stock market are the climate of economic.This bailiwick investigates the electric shock of splashiness estimates, exchange appraises and money supply towards stock market. Based on the previous study, there are several enquiryes that have been handled to investigate this qualified covariant and in mutualist variables.1.3 PROBLEM STATEMENTThis study is to analyze whether there are crucial blood betwixt KLSE Composite Index as a underage variables with the money supply (M3), ostentatiousness rate and exchange rate as an independent variables.Malaysia stock market performance nowadays has staged at an encouraging recovery and gain in selected blue chips and this can be proven when in 2007, Malaysias economy placed the third largest economy in southeasterly Asia. Malaysian stock market is able to provide profitability investment since strengthened domestic spending give be nefit sector trading in Kuala Lumpur Stock Exchange (KLSE).The movement of KLSE Composite Index pompousness depends on many economic factors. For this study, tec tries to figure out whether the economic factors could affect the performance of KLSE Composite Index. The economic factors for this study worry to money supply, splashiness rates and exchange rates. investigator also tries to figure out, whether the economic factors could be major elements of stock investments. fanfare is happen when a country has printed too much money which ordain increase the rate of consumer price and also will affect the damage of vitality. Good news for inflation is, the last report of inflation rate in Malaysia is about only two percent which is in November 2010. There was a negative relationship between inflation rate and stock price. This is because during inflation, cost of living and cost of production will increase and investor will non invest as before inflation happen.Exchange rate i ndicates as a defrayment or change for person that want to do exchange in currency from one country to currency of other country. While for the study in relationship with exchange rate, it also showed a negative relationship. When there is an maturation in level of currency, the charges for each exchange also will be affected. This style they have to change the currency in a large measure and it might affect their money. Therefore, the rational of doing this research is to find out, whether KLSE Composite Index are linked to economic condition in level of money supply, inflation rate and exchange rate?1.4 OBJECTIVES OF THE STUDYThis study is to figure out the relationship, movement and performance of dependent variable and independent variables. It has divided into two types of objectives. The objectives of this study are1.4.1 GENERAL OBJECTIVESThe major objective of this study is to identify the relationship between dependent variable (KLSE-CI) and independent variables which ar e money supply, inflation rates and exchange rates in order to know whether there is any prescribed or negative relationship.1.4.2 SPECIFIC OBJECTIVESTo determine the relationship between inflation rates and KLSE Composite IndexTo determine the relationship between exchange rates and KLSE Composite IndexTo identify whether changes in variables are gullificant in affecting the movement of KLSE Composite Index1.4.3 NULL HYPOTHESES (H0)There is no earthshaking relationship between KLSE Composite Index (dependent variables) with money supply, inflation rates and exchange rates (independent variables).1.5 SCOPE OF THE STUDYThis research paper is to examine the relationship between Kuala Lumpur Stock Exchange Composite Index with level of money supply (M3), inflation rates (CPI) and exchange rates (Ringgit against US Dollar). The selective information for this study are self-possessed a halt for 60 months (5 years) from 2006 to 2010. As been stated, the twofold retroflection analys is is used to measure the relationship between dependent variable and independent variables with monthly basis issued by Bank Negara Malaysia (Central Bank of Malaysia).1.6 limitation OF THE STUDYThere are some desexations in conducting this research. The limitations that have been highlighted are as followLimited variables chosen make it difficult to interpret the relationship of dependent variable and independent variables and it been conclude as not really efficient.The information collected are mostly from internet, journals, newspapers and economic reports. Un unquestionable collected data will lead to unreliable results.The data for this study is gathered for monthly corporal data which taken from Bank Negara Malaysia.Only three independent variables (money supply, inflation rates and exchange rates) have been chosen since there are too many internal factors that can classify the relationship and can affect KLSE Composite Index.This study cover period for 60 months (5 yea rs) 2005 to 2010, are considered quite a brusque period compare to other research. The finding might not be perfectly complete.For this research, only one country is focused which is Malaysia in order to limit the scope of research.The limitation for this research can be more reliable if the data taken establish on weekly basis. Since best research comes with accurate data from weekly or daily basis data.1.7 SIGNIFICANCE OF THE STUDYThis study provides some reclaimable information about the relationship between KLSE Composite Index with levels of inflation rates, exchange rates and money supply.The significant of this study is to build better understanding for readers and useful information to investors in making level-headed investment decision.In addition, this study provides two important aspects in Malaysia economy (exchange rates and inflation rates) which can help companies in Malaysia to make decisions to issue their shares during the period of good economic and during th e economic when it face with high inflation.Studies examining the relationship between money supply, inflation rates and exchange rates under Malaysian experiences are very limited, and it is hope from the available findings from this study, it can be use as a direction or reference for further research.CHAPTER 22.1 LITERATURE round offAccording to Ooi Beng Hooi (2011), authorise The human relationship between KLCI and Ringgit Malaysia against US Dollar, he would like to explain the relationship between stock price and currency exchange rate. Researcher had done his research in four years starting from July 2005 until July 2009. Last, he comes out with the induction that state that a significance and squiffy relationship are explained in both KLCI and Ringgit Malaysia against US Dollar. The results of this research are really useful and in can be us as references for future study.According to Noor Azlinna Azizan and Hasyaliny Sulong (2011), entitled The Preparation Towards Asea n Exchange Link between Malaysia Stock Market and Asia Countries Macroeconomics Variables Interdependency, they investigated the interaction between stock prices and macroeconomic variables in Asia countries include Malaysia, Indonesia, Singapore, Thailand, India, China, South Korea, Japan and chinaware to view the interdependency of our stock market to other Asia countries macroeconomics variables. As a result, the researcher found out that only stock price and exchange rates have the most impact to our stock market.According to Oguzhan Aydamer (2009), with the topic of The kin Between Stock Prices and Exchange Rates Evidence From Turkey, he disclose the relationship between macroeconomics variables such as money supply, inflation rates, exchange rates, enkindle rates and stock price. This research is done for 8 years from February 2001 to January 2008 which focuses in one country that is Turkey. After all the research has been made, he then concludes that there is a negative relationship between exchange rates and all stock market indices. Besides, he also stated that other variables are also having negative relationship.According to Aisyah Abdul Rahman, Noor Zahirah Mohd Sidek and Fauziah Hanim Tafri (2009), a research on Macroeconomic Determinants of Malaysian Stock Market, are investigates the relations between selected macroeconomic variables and stock prices for the case of Malaysia. In addition, this research highlights that Malaysian stock market has weak interaction with money supply, exchange rates and beguile rates as compared to the industrial production index.Sara Alataqi and Shokoofeh Fazel (2008), with topic Can cash Supply Predict Stock Price say that, when they refer to other previous researcher, most of them come with the same result which a positive casual relationship between money supply and stock prices is a great deal hypothesized by some financial analysis. While for both of these researchers, Sara Alataqi and Shokoofeh Fazel theier belive are against with that statement. From the research they have made, the results that they get are all different with the previous study. They have prove the reason and all the calculated data in their research. As a result, they strongly explained that there is a negative relationship from money supply to stock price and also a negative relationship from affair rate to stock price.Paritosh Kumar (2008), Is Indian Stock Market Related with Exchange Rate and Inflation, said that little(a)-term abroad assets are fully exposed to exchange risk of infection and exchange rates movement might affect the domestic companies. He also strongly believes that, a relationship between exchange rates and stock prices do exists but it just does not rule out any relationship between them. The end result for this research is he admit that there is a significance relationship even though it shows a negative sign which means to a negative relationship.According to Shamail Arzu (2008), Relationship Between Exchange Rates and Stock Prices comes to the conclusion which changes immediately in currency can short affect ups and down in the stock index. Besides, he found that mutant in currency rates and movement in stock exchange is negatively will affect imports and exports in a country as well.Koffie Nassar (2005), Money Demand and Inflation said that by doing an analyzing data on the relationship between money supply, prices, inflation and income in Madagascar, it comes to the result which state that a negative coefficient of correlation do exist and inflation expectations are largely determined by every past events. By controlling inflation in the short run, most of the broad money growth can be effective. It concludes that the variables are not strongly significance with the dependent variable.Ramin Cooper Maysami, Lee Chuin Howe and MohamadAtkin Hamzah (2004), Co-integration Evidence From Stock Exchange of Singapores All-S Stock Indices said that the objectiv e of their research is to examine the relationship between selected macroeconomic variables with Singapore Exchange Stock Indices. The result highlighted that the majority of the macroeconomic variables includes broad money, exchange rates and other factors are much more ill have strong casual relationship with Singapore Exchange Stock Indices.According to Chandran V.G.R and Norazman Shah Abd Rahman (2004), entitled Causality between Money Supply and Stock Prices A Preliminary Investigation on Malaysian Stock Market, help the researchers in order to observed the relationship between money supply and stock prices. However, based on this study, researchers are using a simple bivariate sodbuster causality to test the Malaysian stock market. It shows that by predicting the changes in money supply, thereof it may afford for better understanding in stock prices.Ming-Yu Cheng and Hui-Boon topaz (2002), entitled Inflation in Malaysia, sait that the objective of this study is to identify either it make for to the significance relationship or not. Both researchers come to the same conclusion where based on the variables that they have been discussed, it still significance but it cannot be calssified as strong significance.According to Professor J.P.Gupta, Professor Alian Chevalier and Fran Sayekt (2000), entitled The Casuality between Interest Rate, Exchange Rate and Stock Price in Emerging Markets The end of the Jakarta Stock Exchange highlighted that stock market are very complex and it can be very sensitive to exchange rates and interest rates. Any movement in stock market will totally affect the economy. When interest rate and exchange rates are fluctuating, it will cause a bad effect. Other than that, they agreed that interest rate and stock prices are independent series for most of the time and it a same result found in exchange rates which have strong relationship with stock price. Both variables are significance relationship towards stock price.CHAPTER THRE E inquiry METHODOLOGYTo find the result on this research, there are trustworthy methods that can be used in order to determine the information data of relationship between the given variables. In this study, to determine the relationship between dependent variables (KLSE Composite Index) with independent variables (Inflation Rates, Money Supply and Exchange Rates), an analysis named the threefold Regression synopsis and Statistical Package of loving experience (SPSS) is employ in order to analyze data and enhance better understanding for the result.This study covers the period from 2005 to 2010. These methods are the most applicable because it will evaluate the relationship between the variables. SPSS is used to interpret a result in research dapple Multiple Regression Analysis is used to measure the linear tie-up between dependent variable and independent variables3.2 DATA SOURCESMost of the data for this study are come from the secondary data. The closing prices of KLSE Co mposite Index at the end of each period were gathered and the data were achieved from Quarterly closing prices KLSE Composite Index over the period 2005 to 2010.Data for the independent variables, which are money supply (M3), inflation rate (CPI) and exchange rate were achieved from periodic Statistical publicise issued by Central Bank of Malaysia (Bank Negara Malaysia) from 2005 until 2010.3.3 THE DATABased on this study, all the relevant data are the secondary data. There areKLSE COMPOSITE major powerKuala Lumpur Stock Exchange (KLSE), which now known as Bursa Malaysia Berhad is a place for traders to do trading. It contains many counters where each of the counters is for different companies. Besides, it is a self regulatory organization that administers the conduct of its members and also members of stock broking companies. The data for KLSE were gathered from KLSE Yahoo Finance. capital SUPPLYMoney supply is a total supply of money circulation use in economy. There are severa l types of measurement in money supply which known as M1, M2 and M3. In this study, researcher focuses more on M3. M3 which refer to broad money are consists of foreign currency deposits, saving deposits, meliorate deposits, negotiable certificate deposit (NIDS) and repurchase agreement (Repos). The foreign currency deposits refer to deposit of foreign currencies hold by commercial banks, merchant bank and non-bank Malaysian residents. In this research, the data were taken from Monthly Statistical Bulletin of Bank Negara Malaysia.INFLATION rateIn economics, the inflation rate is a measure of inflation. In this study, the data were obtained from Monthly Statistical Bulletin of Bank Negara Malaysia.EXCHANGE RATESExchange rate or also known as foreign exchange rate shows the relationship of currency between one country with others. In this research, researcher focuses on Malaysian (MYR) currency with US currency (USD). add in Malaysia ringgit means a decrease in the cost of exchange of Malaysian currency with other currency. The data for exchange rate were taken from Monthly Statistical Bulletin of Bank Negara Malaysia.THEORETICAL FRAMEWORKIn this study, KLSE Composite Index is chosen as dependent variable and money supply, inflation and exchange rates are classified as the independent variables. This means that the changes in KLSE Composite Index actually depend on the changes in money supply, inflation rates and exchange rates. The diagram of the relationship between both dependent variable and independent variables are being showed belowMoney SupplyInflation RatesKuala Lumpur Stock Exchange Composite Index (KLSE-CI)Exchange Rates restricted VariableIndependent VariableHYPOTHESESThis study consists of Null Hypotheses (H0) and Alternative Hypotheses (H1). The hypotheses are as showed belowHypotheses 1H0 There is no relationship between money supply and KLSE Composite Index.H1 There is a relationship between money supply and KLSE Composite Index.Hypotheses 2H0 There is no relationship between inflation rate and KLSE Composite Index.H1 There is a relationship between inflation rate and KLSE Composite Index.Hypotheses 3H0 There is no relationship between exchange rate and KLSE Composite Index.H1 There is a between exchange rate and KLSE Composite Index.MULTIPLE REGRESSION compendiumData for this study were being study by using the Statistical Package of Social Science (SPSS) Software. Hypotheses are used to determine the relationship between dependent variables (KLSE Composite Index) and independent variables (money supply-M3, inflation rate, exchange rate). In order to determine the influential of money supply, interest rate and exchange rate towards KLSE Composite Index, a Multiple Regression Analysis is applied.This multiple regression analysis used the independent variables to predict the dependent variables.The Estimated Regression Model as followsY = c + M + F + X + WhereY = Dependent Variable (KLSE Composite Index)c = Constant con sideration = Regression Coefficient (Beta Measurement)M = Independent Variable (Money Supply-M3)F = Independent Variable (Inflation Rate)X = Independent Variable (Exchange Rate) = Error TermCOEFFICIENT RELATIONSHIPResearcher used R2, T-Statistic and F-Statistic to determine the relationship between money supply, inflation rate and exchange rate towards KLSE Composite Index.COEFFICIENT OF DETERMINATION (R2)Coefficient of Determination or known as R2 is the most usually used in linear regression. R2 present how well the regression stick guides changes in the determine of dependent variable (Y) that can be explained by the independent variables. It shows how the line fits the data.The measure of R2 is range from zero to one. The range indicates whether the correlation is strong or not. If R2 is zero, the equation explains that there is no relationship between the dependent variable and independent variables. While if the R2 is 1, the equation explains the relationship between depen dent variable and independent variables are do exist.The higher the entertain of R2, the better the regression equation will be. When value of R2 is higher, the exploratory power will increase and be more accurate for forecasting purposes.An equation of R2Total VariationR2 = Total condone VariationThis equation are used when researcher decide to calculate by manual. However, in this study, researcher has chosen Statistical Package of Social Science (SPSS) in order to calculate all the data that are gathered from Bank Negara Malaysia for the 60 months periods.The result of this R2 will be shows and explains in analysis and findings. It also will conclude whether all independent variables will explain the dependent variable or it will not.T STATISTICS ( T-STAT)T- Statistic is used to decide whether to accept or reject the null hypotheses and also to analyze the significant relationship between dependent variable and independent variables. The value in t-table will be compared with the calculated t-value.T is critical value at certain significantT = (n k 1)n = number of observations / yearsk = number of independent variablesIf the computed t-statistic is greater than t-critical value at certain significant levels, thus reject H0. If the computed t-statistic is lower than t-critical value at certain significant levels, thus accept H0.T-Computed T fine Value, accept H1 and reject H0T-Computed F STATISTICS (F-STAT)Researcher is also using F-Statistic in order to know the consistency of overall regression equation. F-Statistic will evaluate the significant of each individual component of entire regression copy.Equation of F-Statistic is as followsF = Explained Variation / (k-1) Unexplained Variation / (n-k)WhereF = critical valuek = number of independent variablen = number of observationIf the computed F-Statistic is greater than F-Statistic value at certain significant level, then reject H0. It is a vice versa when the computed F-Statistic is lower than F-S tatistic value at certain significant level, then accept H0.F-Computed F-Critical Value, accept H1F-Computed DURBIN WATSON STATISTICDurbin Watson is used to test the presence of auto correlation. It is appears when time series data are used. Auto correlation gives a downward bias to the standard fallacy of the estimated coefficient (t-value are exaggerated) and hence the estimated coefficient is concluded to be significant when in mankind they are not.There are three possibilities where the auto correlation problem might ariseWhen the independent variables are duplicatedWhen some of the independent variables are miss specifiedWhen some important variables are found missing in the modelWhen successive residuals are positively auto correlated, the value of D will be approach zero. If the residual are not correlated, the value of D will be closed to zero. If there is a negative auto correlated, the value of D will be greater than two and could even approach its nominal value of fou r.Equation of Durbin Watson Statistic (D) is defining asD =PEARSON CORRELATION ANALYSISPearson correlation analysis is a statistical analysis to see the direction and to describe the strength and significance of the relationships between the dependent variables and the independent variables. According to Pearson correlation analysis, the result can be ranked as followsLess than 0.30 = Week Relationship0.30 to 0.49 = Moderate Relationship0.50 to 0.69 = Strong Relationship0.70 to 0.99 = Very Strong Relationship1.0 = Perfect RelationshipCHAPTER FOURANALYSIS AND FINDINGSThis chapter provides the findings which are obtained from the Statistical Package for Social Science (SPSS). Through SPSS, the relationship between Money Supply (M3), Inflation Rate and Exchange Rate with KLSE Composite Index can be identified. The researcher used regression in order to measure the linear relationship between dependent variable and independent variables. Coefficient of determinations (R2), T- statistic and F- statistic are the methodologies that being used by researcher to interpret the multiple regressions.All the data were calculated on monthly basis for 60 months period (5-year), which are from January 2006 to December 2010.Table1 Data gathered from monthly statistical bulletin BNM courseKLSEM3INFLATIONEXCHANGEJan-06914.0100679276.30003.25003.7510Feb-06928.9400686040.70003.24003.7135Mar-06926.6300690830.20004.76003.6860Apr-06949.2300697329.40004.55003.6255May-06927.7800699037.40003.91003.6290Jun-06914.6900700537.80003.90003.6750Jul-06935.8500705585.50004.11003.6535Aug-06958.1200717140.90003.28003.6770Sep-06967.5500716265.60003.27003.6845Oct-06988.3000725351.20003.07003.6480Nov-061080.6600737229.60002.96003.6180Dec-061096.2400760301.60003.05003.5315Jan-071189.3500776100.80003.24003.5015Feb-071196.4500789147.00003.14003.5060Mar-071246.8700789222.50001.55003.4560Apr-071322.2500796487.80001.55003.4230May-071346.8900799238.90001.45003.4045Jun-071354.3800788610.80001.44003.4545Jul-07 1373.7100799902.20001.63003.4540Aug-071273.9300801630.30001.92003.5035Sep-071336.3000804248.70001.83003.4170Oct-071413.6500807425.80001.92003.3418Nov-071396.9800808446.50002.30003.3585Dec-071445.0300832737.80002.39003.3065Jan-081393.2500867682.20002.28003.2360Feb-081357.4000876225.70002.66003.1890Mar-081247.5200884372.90002.76003.1875Apr-081279.8600893619.30003.05003.1580May-081276.1000898652.60003.81003.2435Jun-081186.5700899120.00007.69003.2665Jul-081163.0900912693.30008.51003.2630Aug-081100.5000904562.20008.50003.3895Sep-081018.6800912780.00008.21003.4575Oct-08863.6100900442.60007.63003.5625Nov-08866.1400909230.60005.71003.6175Dec-08876.7500931864.70004.39003.4640YEARKLSEM3INFLATIONEXCHANGEJan-09884.4500946005.10003.91003.6085Feb-09890.6700944320.50003.7100KLSE Relationship with Inflation and Exchange RatesKLSE Relationship with Inflation and Exchange RatesCapital market is a financial market which is for long term investment funds with the maturities greater than one year. In US A, capital market was controlled by security exchange and it was established in 1934. While in Malaysia, Bank Negara Malaysia (BNM) capital market has been developed since 1980s. It is a market where securities such as common stock, preferred stock and bonds are issued or traded. Companies, government and other organizations use capital market in order to raise funds for their operations. In other words, capital market helps organizations or institutions whether in public and private sector to gain capital. Besides that, capital market also traded an investment funds like debt, equity and mortgage loan. The central bank, Bank Negara Malaysia (BNM) also played a very important role in develop and bang of this market.Kuala Lumpur Stock Exchange or more popular known as KLSE is the only one stock market in this country. All the listed securities in Malaysia are done by KLSE since the KLSE is a self-regulatory. Based on this study, KLSE Composite Index are represented by the stock mark et, money supply represented by M3, consumer price index represented the inflation rates and exchange rates represented by the Malaysian Ringgit (RM) against the US Dollar. In KLSE it has their own rules where buyers and sellers trade their transaction with each other. Since KLSE was established, there were ups and down movement of KLSE causes by many variables.To measure the performance of stock market, stock index is used. Besides, it can be used by all investors as a benchmark for them to evaluate the performance of holding shares. KLSE Composite Index is comprised of 100 companies listed on the exchange. The movement of stock prices can be triggered by the movement in financial sector in particular, that is the money supply. From this situation, there might be a relationship between KLSE Composite Index with money supply.A negative relationship between stock market and inflation in India and by previous study that also comes out with the same result might support the relationshi p between KLSE Composite Index with inflation rates.The motivation of this study is to find out whether there is a relationship between KLSE Composite Index with the level of money supply, inflation rates and exchange rates. Thus, if the Malaysian economic are facing with inflation, the stock price will be low and vice versa.1.2 BACKGROUND OF THE STUDYKuala Lumpur Stock Exchange (KLSE) is a formal stock market and it is widely constructed such as the composite index, EMAS index, and the various sector indices of tin, plantation, hotel, services, automobile, industrial and properties. KLSE is a self-regulatory organization and has emerged as one of the top performing bourses in developing countries in 1992.Based on the previous study, stock index is used to measure the performance of all stock market. KLSE calculate the index for each main sector traded however, mostly it will use the KLSE Composite Index because it will comprise the stocks traded on the KLSE. Since it is the only st ock market in Malaysia, the monitoring and supervising do by Minister of Finance (MOF) and by Securities Commission (SC).KLSE Composite Index has been introduced on 1986 where one stock index was needed which can act to stock market performance and Malaysia economy. All the data that has been calculated electronically by KLSE can be taken by brokers companies and other customers at any time since the index is base on minute to minute.KLSE are really a well known stock market in the world. In 1970s and 1980s, KLSE had major development until it had become one of the largest market capitalization bourses in South-East Asia.However, when Singapore out from Malaysia in 1965, the Stock Exchange of Malaysia then, known as the Stock Exchange of Malaysia and Singapore. In spite of, in 1973 when the currency exchange between Malaysia and Singapore drop, again it changes the name and become Kuala Lumpur Stock Exchange and Stock Exchange of Singapore.In 2004, KLSE has changed it name and now i t is known as Bursa Malaysia Berhad. This Bursa Malaysia focused to improve the products and services that they conduct. While in year 2005, Bursa Malaysia was listed on the Main Board of Bursa Malaysia Security Berhad.While in KLSE Composite Index, it has been accepted as a local stock market barometer when it was introduced in 1986. From the investor side, the major factors that determine the stock market are the climate of economic.This study investigates the impact of inflation rates, exchange rates and money supply towards stock market. Based on the previous study, there are several researches that have been handled to investigate this dependent variable and independent variables.1.3 PROBLEM STATEMENTThis study is to analyze whether there are significant relationship between KLSE Composite Index as a dependent variables with the money supply (M3), inflation rate and exchange rate as an independent variables.Malaysia stock market performance nowadays has staged at an encouraging recovery and gain in selected blue chips and this can be proved when in 2007, Malaysias economy placed the third largest economy in Southeast Asia. Malaysian stock market is able to provide profitability investment since strong domestic spending give benefit sector trading in Kuala Lumpur Stock Exchange (KLSE).The movement of KLSE Composite Index Inflation depends on many economic factors. For this study, researcher tries to figure out whether the economic factors could affect the performance of KLSE Composite Index. The economic factors for this study refer to money supply, inflation rates and exchange rates. Researcher also tries to figure out, whether the economic factors could be major elements of stock investments.Inflation is happen when a country has printed too much money which will increase the rate of consumer price and also will affect the cost of living. Good news for inflation is, the last report of inflation rate in Malaysia is about only two percent which is in Novem ber 2010. There was a negative relationship between inflation rate and stock price. This is because during inflation, cost of living and cost of production will increase and investor will not invest as before inflation happen.Exchange rate refers as a payment or change for person that want to do exchange in currency from one country to currency of other country. While for the study in relationship with exchange rate, it also showed a negative relationship. When there is an increment in level of currency, the charges for each exchange also will be affected. This means they have to change the currency in a large amount and it might affect their money. Therefore, the rational of doing this research is to find out, whether KLSE Composite Index are linked to economic condition in level of money supply, inflation rate and exchange rate?1.4 OBJECTIVES OF THE STUDYThis study is to figure out the relationship, movement and performance of dependent variable and independent variables. It has d ivided into two types of objectives. The objectives of this study are1.4.1 GENERAL OBJECTIVESThe major objective of this study is to identify the relationship between dependent variable (KLSE-CI) and independent variables which are money supply, inflation rates and exchange rates in order to know whether there is any positive or negative relationship.1.4.2 SPECIFIC OBJECTIVESTo determine the relationship between inflation rates and KLSE Composite IndexTo determine the relationship between exchange rates and KLSE Composite IndexTo identify whether changes in variables are significant in affecting the movement of KLSE Composite Index1.4.3 NULL HYPOTHESES (H0)There is no significant relationship between KLSE Composite Index (dependent variables) with money supply, inflation rates and exchange rates (independent variables).1.5 SCOPE OF THE STUDYThis research paper is to examine the relationship between Kuala Lumpur Stock Exchange Composite Index with level of money supply (M3), inflatio n rates (CPI) and exchange rates (Ringgit against US Dollar). The data for this study are gathered a period for 60 months (5 years) from 2006 to 2010. As been stated, the multiple regression analysis is used to measure the relationship between dependent variable and independent variables with monthly basis issued by Bank Negara Malaysia (Central Bank of Malaysia).1.6 LIMITATION OF THE STUDYThere are some limitations in conducting this research. The limitations that have been highlighted are as followLimited variables chosen make it difficult to interpret the relationship of dependent variable and independent variables and it been conclude as not really efficient.The data collected are mostly from internet, journals, newspapers and economic reports. Unreliable collected data will lead to unreliable results.The data for this study is gathered for monthly collective data which taken from Bank Negara Malaysia.Only three independent variables (money supply, inflation rates and exchange r ates) have been chosen since there are too many internal factors that can classify the relationship and can affect KLSE Composite Index.This study cover period for 60 months (5 years) 2005 to 2010, are considered quite a short period compare to other research. The finding might not be perfectly accurate.For this research, only one country is focused which is Malaysia in order to limit the scope of research.The limitation for this research can be more reliable if the data taken based on weekly basis. Since best research comes with accurate data from weekly or daily basis data.1.7 SIGNIFICANCE OF THE STUDYThis study provides some useful information about the relationship between KLSE Composite Index with levels of inflation rates, exchange rates and money supply.The significant of this study is to build better understanding for readers and useful information to investors in making good investment decision.In addition, this study provides two important aspects in Malaysia economy (exch ange rates and inflation rates) which can help companies in Malaysia to make decisions to issue their shares during the period of good economic and during the economic when it face with high inflation.Studies examining the relationship between money supply, inflation rates and exchange rates under Malaysian experiences are very limited, and it is hope from the available findings from this study, it can be use as a direction or reference for further research.CHAPTER 22.1 LITERATURE REVIEWAccording to Ooi Beng Hooi (2011), entitled The Relationship between KLCI and Ringgit Malaysia against US Dollar, he would like to explain the relationship between stock price and currency exchange rate. Researcher had done his research in four years starting from July 2005 until July 2009. Last, he comes out with the conclusion that state that a significance and strong relationship are explained in both KLCI and Ringgit Malaysia against US Dollar. The results of this research are really useful and i n can be us as references for future study.According to Noor Azlinna Azizan and Hasyaliny Sulong (2011), entitled The Preparation Towards Asean Exchange Link between Malaysia Stock Market and Asia Countries Macroeconomics Variables Interdependency, they investigated the interaction between stock prices and macroeconomic variables in Asia countries include Malaysia, Indonesia, Singapore, Thailand, India, China, South Korea, Japan and Taiwan to view the interdependency of our stock market to other Asia countries macroeconomics variables. As a result, the researcher found out that only stock price and exchange rates have the most impact to our stock market.According to Oguzhan Aydamer (2009), with the topic of The Relationship Between Stock Prices and Exchange Rates Evidence From Turkey, he disclose the relationship between macroeconomics variables such as money supply, inflation rates, exchange rates, interest rates and stock price. This research is done for 8 years from February 2001 to January 2008 which focuses in one country that is Turkey. After all the research has been made, he then concludes that there is a negative relationship between exchange rates and all stock market indices. Besides, he also stated that other variables are also having negative relationship.According to Aisyah Abdul Rahman, Noor Zahirah Mohd Sidek and Fauziah Hanim Tafri (2009), a research on Macroeconomic Determinants of Malaysian Stock Market, are investigates the relations between selected macroeconomic variables and stock prices for the case of Malaysia. In addition, this research highlights that Malaysian stock market has weak interaction with money supply, exchange rates and interest rates as compared to the industrial production index.Sara Alataqi and Shokoofeh Fazel (2008), with topic Can Money Supply Predict Stock Price said that, when they refer to other previous researcher, most of them come with the same result which a positive casual relationship between money supply an d stock prices is frequently hypothesized by some financial analysis. While for both of these researchers, Sara Alataqi and Shokoofeh Fazel theier belive are against with that statement. From the research they have made, the results that they get are totally different with the previous study. They have proved the reason and all the calculated data in their research. As a result, they strongly explained that there is a negative relationship from money supply to stock price and also a negative relationship from interest rate to stock price.Paritosh Kumar (2008), Is Indian Stock Market Related with Exchange Rate and Inflation, said that short-term foreign assets are fully exposed to exchange risk and exchange rates movement might affect the domestic companies. He also strongly believes that, a relationship between exchange rates and stock prices do exists but it just does not rule out any relationship between them. The end result for this research is he admit that there is a significan ce relationship even though it shows a negative sign which means to a negative relationship.According to Shamail Arzu (2008), Relationship Between Exchange Rates and Stock Prices comes to the conclusion which changes immediately in currency can absolutely affect ups and down in the stock index. Besides, he found that fluctuation in currency rates and movement in stock exchange is negatively will affect imports and exports in a country as well.Koffie Nassar (2005), Money Demand and Inflation said that by doing an analyzing data on the relationship between money supply, prices, inflation and income in Madagascar, it comes to the result which state that a negative correlation do exist and inflation expectations are largely determined by every past events. By controlling inflation in the short run, most of the broad money growth can be effective. It concludes that the variables are not strongly significance with the dependent variable.Ramin Cooper Maysami, Lee Chuin Howe and MohamadAtki n Hamzah (2004), Co-integration Evidence From Stock Exchange of Singapores All-S Stock Indices said that the objective of their research is to examine the relationship between selected macroeconomic variables with Singapore Exchange Stock Indices. The result highlighted that the majority of the macroeconomic variables includes broad money, exchange rates and other factors are much more seriously have strong casual relationship with Singapore Exchange Stock Indices.According to Chandran V.G.R and Norazman Shah Abd Rahman (2004), entitled Causality between Money Supply and Stock Prices A Preliminary Investigation on Malaysian Stock Market, help the researchers in order to observed the relationship between money supply and stock prices. However, based on this study, researchers are using a simple bivariate Granger causality to test the Malaysian stock market. It shows that by predicting the changes in money supply, thus it may afford for better understanding in stock prices.Ming-Yu Che ng and Hui-Boon Tan (2002), entitled Inflation in Malaysia, sait that the objective of this study is to identify either it contribute to the significance relationship or not. Both researchers come to the same conclusion where based on the variables that they have been discussed, it still significance but it cannot be calssified as strong significance.According to Professor J.P.Gupta, Professor Alian Chevalier and Fran Sayekt (2000), entitled The Casuality between Interest Rate, Exchange Rate and Stock Price in Emerging Markets The Case of the Jakarta Stock Exchange highlighted that stock market are very complex and it can be very sensitive to exchange rates and interest rates. Any movement in stock market will totally affect the economy. When interest rate and exchange rates are fluctuating, it will cause a bad effect. Other than that, they agreed that interest rate and stock prices are independent series for most of the time and it a same result found in exchange rates which have s trong relationship with stock price. Both variables are significance relationship towards stock price.CHAPTER THREERESEARCH METHODOLOGYTo find the result on this research, there are certain methods that can be used in order to determine the information data of relationship between the given variables. In this study, to determine the relationship between dependent variables (KLSE Composite Index) with independent variables (Inflation Rates, Money Supply and Exchange Rates), an analysis named the Multiple Regression Analysis and Statistical Package of Social Science (SPSS) is applied in order to analyze data and enhance better understanding for the result.This study covers the period from 2005 to 2010. These methods are the most applicable because it will evaluate the relationship between the variables. SPSS is used to interpret a result in research while Multiple Regression Analysis is used to measure the linear association between dependent variable and independent variables3.2 DATA SOURCESMost of the data for this study are come from the secondary data. The closing prices of KLSE Composite Index at the end of each period were gathered and the data were achieved from Quarterly closing prices KLSE Composite Index over the period 2005 to 2010.Data for the independent variables, which are money supply (M3), inflation rate (CPI) and exchange rate were achieved from Monthly Statistical Bulletin issued by Central Bank of Malaysia (Bank Negara Malaysia) from 2005 until 2010.3.3 THE DATABased on this study, all the relevant data are the secondary data. There areKLSE COMPOSITE INDEXKuala Lumpur Stock Exchange (KLSE), which now known as Bursa Malaysia Berhad is a place for traders to do trading. It contains many counters where each of the counters is for different companies. Besides, it is a self regulatory organization that administers the conduct of its members and also members of stock broking companies. The data for KLSE were gathered from KLSE Yahoo Finance.MONEY S UPPLYMoney supply is a total supply of money circulation use in economy. There are several types of measurement in money supply which known as M1, M2 and M3. In this study, researcher focuses more on M3. M3 which refer to broad money are consists of foreign currency deposits, saving deposits, fixed deposits, negotiable certificate deposit (NIDS) and repurchase agreement (Repos). The foreign currency deposits refer to deposit of foreign currencies hold by commercial banks, merchant bank and non-bank Malaysian residents. In this research, the data were taken from Monthly Statistical Bulletin of Bank Negara Malaysia.INFLATION RATESIn economics, the inflation rate is a measure of inflation. In this study, the data were obtained from Monthly Statistical Bulletin of Bank Negara Malaysia.EXCHANGE RATESExchange rate or also known as foreign exchange rate shows the relationship of currency between one country with others. In this research, researcher focuses on Malaysian (MYR) currency with US currency (USD). Increase in Malaysia ringgit means a decrease in the cost of exchange of Malaysian currency with other currency. The data for exchange rate were taken from Monthly Statistical Bulletin of Bank Negara Malaysia.THEORETICAL FRAMEWORKIn this study, KLSE Composite Index is chosen as dependent variable and money supply, inflation and exchange rates are classified as the independent variables. This means that the changes in KLSE Composite Index actually depend on the changes in money supply, inflation rates and exchange rates. The diagram of the relationship between both dependent variable and independent variables are being showed belowMoney SupplyInflation RatesKuala Lumpur Stock Exchange Composite Index (KLSE-CI)Exchange RatesDependent VariableIndependent VariableHYPOTHESESThis study consists of Null Hypotheses (H0) and Alternative Hypotheses (H1). The hypotheses are as showed belowHypotheses 1H0 There is no relationship between money supply and KLSE Composite Index.H 1 There is a relationship between money supply and KLSE Composite Index.Hypotheses 2H0 There is no relationship between inflation rate and KLSE Composite Index.H1 There is a relationship between inflation rate and KLSE Composite Index.Hypotheses 3H0 There is no relationship between exchange rate and KLSE Composite Index.H1 There is a between exchange rate and KLSE Composite Index.MULTIPLE REGRESSION ANALYSISData for this study were being analyzed by using the Statistical Package of Social Science (SPSS) Software. Hypotheses are used to determine the relationship between dependent variables (KLSE Composite Index) and independent variables (money supply-M3, inflation rate, exchange rate). In order to determine the influential of money supply, interest rate and exchange rate towards KLSE Composite Index, a Multiple Regression Analysis is applied.This multiple regression analysis used the independent variables to predict the dependent variables.The Estimated Regression Model as followsY = c + M + F + X + WhereY = Dependent Variable (KLSE Composite Index)c = Constant Term = Regression Coefficient (Beta Measurement)M = Independent Variable (Money Supply-M3)F = Independent Variable (Inflation Rate)X = Independent Variable (Exchange Rate) = Error TermCOEFFICIENT RELATIONSHIPResearcher used R2, T-Statistic and F-Statistic to determine the relationship between money supply, inflation rate and exchange rate towards KLSE Composite Index.COEFFICIENT OF DETERMINATION (R2)Coefficient of Determination or known as R2 is the most usually used in linear regression. R2 present how well the regression model describes changes in the value of dependent variable (Y) that can be explained by the independent variables. It shows how the line fits the data.The value of R2 is range from zero to one. The range indicates whether the correlation is strong or not. If R2 is zero, the equation explains that there is no relationship between the dependent variable and independent variables. While if the R2 is 1, the equation explains the relationship between dependent variable and independent variables are do exist.The higher the value of R2, the better the regression equation will be. When value of R2 is higher, the exploratory power will increase and be more accurate for forecasting purposes.An equation of R2Total VariationR2 = Total Explain VariationThis equation are used when researcher decide to calculate by manual. However, in this study, researcher has chosen Statistical Package of Social Science (SPSS) in order to calculate all the data that are gathered from Bank Negara Malaysia for the 60 months periods.The result of this R2 will be shows and explains in analysis and findings. It also will conclude whether all independent variables will explain the dependent variable or it will not.T STATISTICS ( T-STAT)T- Statistic is used to decide whether to accept or reject the null hypotheses and also to analyze the significant relationship between dependent variable and ind ependent variables. The value in t-table will be compared with the calculated t-value.T is critical value at certain significantT = (n k 1)n = number of observations / yearsk = number of independent variablesIf the computed t-statistic is greater than t-critical value at certain significant levels, thus reject H0. If the computed t-statistic is lower than t-critical value at certain significant levels, thus accept H0.T-Computed T Critical Value, accept H1 and reject H0T-Computed F STATISTICS (F-STAT)Researcher is also using F-Statistic in order to know the consistency of overall regression equation. F-Statistic will evaluate the significant of each individual component of entire regression model.Equation of F-Statistic is as followsF = Explained Variation / (k-1) Unexplained Variation / (n-k)WhereF = critical valuek = number of independent variablen = number of observationIf the computed F-Statistic is greater than F-Statistic value at certain significant level, then reject H0. It is a vice versa when the computed F-Statistic is lower than F-Statistic value at certain significant level, then accept H0.F-Computed F-Critical Value, accept H1F-Computed DURBIN WATSON STATISTICDurbin Watson is used to test the presence of auto correlation. It is appears when time series data are used. Auto correlation gives a downward bias to the standard error of the estimated coefficient (t-value are exaggerated) and hence the estimated coefficient is concluded to be significant when in reality they are not.There are three possibilities where the auto correlation problem might ariseWhen the independent variables are duplicatedWhen some of the independent variables are miss specifiedWhen some important variables are found missing in the modelWhen successive residuals are positively auto correlated, the value of D will be approach zero. If the residual are not correlated, the value of D will be closed to zero. If there is a negative auto correlated, the value of D will be grea ter than two and could even approach its minimum value of four.Equation of Durbin Watson Statistic (D) is defining asD =PEARSON CORRELATION ANALYSISPearson correlation analysis is a statistical analysis to see the direction and to describe the strength and significance of the relationships between the dependent variables and the independent variables. According to Pearson correlation analysis, the result can be ranked as followsLess than 0.30 = Week Relationship0.30 to 0.49 = Moderate Relationship0.50 to 0.69 = Strong Relationship0.70 to 0.99 = Very Strong Relationship1.0 = Perfect RelationshipCHAPTER FOURANALYSIS AND FINDINGSThis chapter provides the findings which are obtained from the Statistical Package for Social Science (SPSS). Through SPSS, the relationship between Money Supply (M3), Inflation Rate and Exchange Rate with KLSE Composite Index can be identified. The researcher used regression in order to measure the linear relationship between dependent variable and independent variables. Coefficient of determinations (R2), T- statistic and F- statistic are the methodologies that being used by researcher to interpret the multiple regressions.All the data were calculated on monthly basis for 60 months period (5-year), which are from January 2006 to December 2010.Table1 Data gathered from monthly statistical bulletin BNMYEARKLSEM3INFLATIONEXCHANGEJan-06914.0100679276.30003.25003.7510Feb-06928.9400686040.70003.24003.7135Mar-06926.6300690830.20004.76003.6860Apr-06949.2300697329.40004.55003.6255May-06927.7800699037.40003.91003.6290Jun-06914.6900700537.80003.90003.6750Jul-06935.8500705585.50004.11003.6535Aug-06958.1200717140.90003.28003.6770Sep-06967.5500716265.60003.27003.6845Oct-06988.3000725351.20003.07003.6480Nov-061080.6600737229.60002.96003.6180Dec-061096.2400760301.60003.05003.5315Jan-071189.3500776100.80003.24003.5015Feb-071196.4500789147.00003.14003.5060Mar-071246.8700789222.50001.55003.4560Apr-071322.2500796487.80001.55003.4230May-071346.8900799238.90 001.45003.4045Jun-071354.3800788610.80001.44003.4545Jul-071373.7100799902.20001.63003.4540Aug-071273.9300801630.30001.92003.5035Sep-071336.3000804248.70001.83003.4170Oct-071413.6500807425.80001.92003.3418Nov-071396.9800808446.50002.30003.3585Dec-071445.0300832737.80002.39003.3065Jan-081393.2500867682.20002.28003.2360Feb-081357.4000876225.70002.66003.1890Mar-081247.5200884372.90002.76003.1875Apr-081279.8600893619.30003.05003.1580May-081276.1000898652.60003.81003.2435Jun-081186.5700899120.00007.69003.2665Jul-081163.0900912693.30008.51003.2630Aug-081100.5000904562.20008.50003.3895Sep-081018.6800912780.00008.21003.4575Oct-08863.6100900442.60007.63003.5625Nov-08866.1400909230.60005.71003.6175Dec-08876.7500931864.70004.39003.4640YEARKLSEM3INFLATIONEXCHANGEJan-09884.4500946005.10003.91003.6085Feb-09890.6700944320.50003.7100