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

Abstract

This study is pursued with the objective of examining the effect of changesin crude oil price on the share prices of public listed companies on BursaMalaysia and the Jakarta Stock Exchange as proxied by the Kuala LumpurComposite Index (KLCI) and Jakarta Composite Index (JCI), respectively.The study employs the Engle-Granger Cointegration test and ErrorCorrection Modelling (ECM). Using time series data from January 1986through December 2006, this study finds a significant long-term relationshipbetween the movement of crude oil price and the performance of the twostock markets. The two observed variables in both stock markets are alsofound to be positively correlated. The test results from Impulse ResponseFunction and Variance Decomposition show the presence of a dynamicinteraction between the movement in crude oil prices and the two stockmarket indices.