Abstract:
The aim of this research is to investigate the determinants of the volatilitv of the Kwda
Lumpur Composite Index using the Vector Error Correction Model (VECM). This model
was chosen due to its ability to analyse the effects of the selected macroeconomic
variables both in the short term and long term. Augmented Dickey Fuller (ADF) and
Philips Peron (PP) tests were conducted to test the stationarity of the data as well as the
Johansen Cointergration test to determine the long term relationship. In order tu utilize
the model, monthly datas from 1995 to 2006 were obtain to conduct the tests, which
consists of interest rate, inflationary rate measured in terms of the Consumer Price Index
(CPI) and exchange rate measured in terms of USO$. Test results indicated that there is
a short term relationship between these variables with the KLCI except the CPI which
shows no significant results in the short term. However, in the long term, all variables
affects the volatility of the KLCI.
