The price linkages between Malaysian unit trust funds and the stock market: Short run and long run interrelationships

Abstract

Purpose

The primary objective of the paper is to examine the short and long run price linkages between Malaysian unit trust funds and the stock market index as proxied by the Kuala Lumpur composite index (KLCI) over the period 1996‐2000.

Design/methodology/approach

Cointegration analyses are used to identify the long run relationship between unit trust funds and the stock market index while Granger causality tests are used to measure the short run price linkages.

Findings

Cointegration results show that the long run pricing performance of the unit trust funds differs significantly from that of the KLCI. Interestingly, the findings also reveal that two index funds are found not to be cointegrated with the stock market index. In the short run, one‐way Granger causality test shows that changes in the KLCI Granger causes changes in the unit trust funds. This suggests that fund managers are responding to the past changes in the stock market index over the short run.

Research limitations/implications

The findings of non‐cointegration between passively managed funds and the KLCI are restricted to only two index funds in the sample among other actively managed funds. Since there were not enough index funds available over the study period, future research should include more index funds in the analysis.

Practical implications

In the short run, investors may gather information on the changes in their portfolio composition by observing the movement in the KLCI.

Originality/value

The paper represents the first evidence on the pricing relationships between unit trust funds and the local stock market index and the findings are important to investors in terms of their investment strategies.

Citation

Low, S. and Azlan Ghazali, N. (2007), "The price linkages between Malaysian unit trust funds and the stock market: Short run and long run interrelationships", Managerial Finance, Vol. 33 No. 2, pp. 89-101. https://doi.org/10.1108/03074350710715827