THE EFFECT OF OIL PRICE VOLATILITY ON ASEAN STOCK MARKET PERFORMANCE - EVIDENCE FROM BURSA MALAYSIA AND PHILIPPINE STOCK EXCHANGE

Purpose - The purpose of this paper is to investigate the effect of changes in oil price on the share prices of public listed companies in Bursa Malaysia Securities Berhad and Philippine Stock Exchange (PSE). Design/methodology/approach - The issue of stock price sensitivities towards changes in oil price are examined based on the past literature. Using time series data from January 1986 through December 2006, the study employs Engle-Granger Cointegration test and Error Correction Model. Findings - The study reveals that there is a significant long-term relationship between oil price movements and the performances of the two stock markets. The movements of oil price and the market indexes in both stock markets are found to be positively correlated. However, the statistical results from Granger Causality test show an absence of dynamic relationship between oil price movements and the performance of both stock markets. Research limitations/implications - An understanding in the direction of the oil price movements or the trend movements is important for stock traders and international fund managers in formulating their investment strategies in the future. The paper offers scope for further research into the application of out-of-sample forecasting via impulse response functions and variance decomposition techniques. Originality/value - The paper contributes to the finance literature on investment strategies and efficient market theory.