e-ISSN 2231-8542
ISSN 1511-3701

Home / Regular Issue / JTAS Vol. 25 (1) Mar. 2017 / JSSH-1489-2015


Banking Liquidity and Stock Market Prices in Three Countries in ASEAN

Tin-fah Chung, M. Ariff and Shamsher M.

Pertanika Journal of Tropical Agricultural Science, Volume 25, Issue 1, March 2017

Keywords: ASEAN countries, liquidity, bubble, pooled mean group, Dynamic Fixed Effects, Cointegration, Structural break, Panel Unit Roots

Published on: 29 Mar 2017

This paper reports evidence of a banking liquidity impact on stock prices in the three Asean countries. Banking liquidity impacts suggested by Friedman is yet to be fully investigated nor verified despite several attempts. If improved liquidity of banks leads to credit expansion, which in turn leads to more positive net present value projects undertaken by firms, earnings of the latter must go up, and hence the share prices should rise. This link is worth an investigation. According to an influential of the US stock market, up to 52% of share returns are due to changes in the macro economy. Using a 3-equation structural model as well as employing corrections for cross-section dependence, we examine the link between money supply, liquidity and stock prices over 2001:4Q and 2012:2Q in three developing countries. It is found money supply changes lead to a positive liquidity effect and banking liquidity impacts share market prices positively. These findings are new and in support of Friedman's liquidity proposition, and also constitute evidence of a banking liquidity having a positive effect on asset prices.

ISSN 1511-3701

e-ISSN 2231-8542

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