Open AccessForeign Portfolio Investment and Economic Growth in Malaysia
Author(s) -
Jarita Duasa,
Salina Kassim
Publication year - 2009
Publication title -
pakistan development review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.154
H-Index - 26
ISSN - 0030-9729
DOI - 10.30541/v48i2pp.109-123
Subject(s) - granger causality , economics , variance decomposition of forecast errors , volatility (finance) , portfolio , foreign direct investment , econometrics , gross domestic product , causality (physics) , real gross domestic product , monetary economics , macroeconomics , financial economics , physics , quantum mechanics
This study examines the relationship between foreign portfolioinvestment (FPI) and Malaysia’s economic performance. In particular, thestudy analyses the relationship between FPI and real gross domesticproduct (GDP) using the widely adopted Granger causality test and themore recent Toda and Yamamoto’s (1995) non-causality test to establishthe direction of causation between the two variables. Similar method isalso applied on the relationship between volatility of FPI and real GDP.Additionally, the study uses an innovation accounting by simulatingvariance decompositions and impulse response functions for furtherinferences. Using quarterly data covering the period from 1991 to 2006,the study finds evidence that economic growth causes changes in the FPIand its volatility and not vice versa.. The findings suggest thateconomic performance is the major pull factor in attracting FPI into thecountry. Thus, it must be ensured that the Malaysian economy remains ona healthy and sustainable growth path so as to maintain investorconfidence in the economy. JEL classification: G15, C32, C12 Keywords:Foreign Portfolio Investment, Economic Growth, Granger Causality,Toda-Yamamoto Non-causality, Variance Decomposition