Global Commodity Prices, Domestic Financial Conditions and Equity Market Performance in Malaysia: Evidence from a Vector Error Correction Model

Abstract

Global commodity shocks and changing financial conditions can influence economic and financial resilience in emerging economies through interconnected international and domestic markets. Understanding these transmission mechanisms is important for assessing the vulnerability of emerging-market economies to external disturbances and their implications for investment and economic stability. This study examines the long- and short-run relationships among global commodity prices, domestic sovereign bond yields and the Malaysian equity market (FBM KLCI), with particular attention to the transmission of external market conditions into Malaysia's domestic financial system. Using synchronised daily data from 22 May 2020 to 24 March 2025, we estimate a Vector Error Correction Model (VECM) incorporating the FBM KLCI, West Texas Intermediate (WTI) crude oil prices, London gold prices and 10-year Malaysian Government Securities (MGS) yields. Augmented Dickey–Fuller tests indicate that the variables are integrated of order one, while Johansen tests identify cointegrating relationships among them. The long-run estimates show that higher bond yields, gold prices and crude oil prices are each associated with lower equity valuations, with domestic bond yields exerting the strongest effect. In the short run, the FBM KLCI corrects approximately 17.30% of its deviation from equilibrium per trading day, while MGS yields exhibit evidence of overshooting. Wald tests find no significant joint short-run causality from the external and domestic financial drivers to daily equity returns, whereas variance decomposition shows their combined explanatory power increasing to approximately 24% over a 20-day horizon. The findings suggest that Malaysia's financial system is relatively insulated from daily external disturbances but remains connected to global market conditions over longer horizons, highlighting the importance of financial resilience and external-shock management in emerging economies.