# Chapter 4: DATA ANALYSIS AND DISCUSSION

## 4.1 Descriptive Statistics

In this section, the descriptive statistics of interest rates as well as stock returns for the countries in South East Asia being investigated in this dissertation is presented. As discussed previously, the stock returns can be proxy by the changes/ growth in market capitalization (i.e., which is the changes in market capitalization of the stock market index of the respective countries); while the changes of interest rates is represented by the lending interest rate adjusted for inflation as measured by the GDP deflator for the respective countries. The details on the data course and definition of these variables can be found in Chapter 3.

In Table 4.1 below, the descriptive statistics for both changes in stock returns and changes in interest rates are presented. It is found that the mean of the stock returns are generally positive. However, for the mean for the changes in interest rates, the mean for that variable in Indonesia and Thailand is negative. Then, it is also found that the standard deviation of stock returns is largest for Indonesia, followed by Thailand, Philippines, Singapore and Malaysia. This suggests that the stock prices volatility is greatest in Indonesia, followed by in Thailand, Philippines, Singapore and Malaysia. In the next section, the descriptive statistics of these variables will be presented in histogram – to enable readers to investigate the distribution of the variables in graphical format.

## 4.2 Histograms of Stock Returns for Countries in South East Asia

In this section, the stock returns as well as changes in interest rates for the following countries, namely, Indonesia, Thailand, Philippines, Singapore and Malaysia are shown. By investigating the distribution of stock returns or the changes of interest rates in the respective countries, investors may be able to understand how these variables are distributed from a historical perspective. This will enhance investors’ understanding if the variables are normally distributed, or not. Besides, the historical performance of the stock returns for the respective countries will likely to inform investors on the likely rate of returns to be expected from the different countries.

As shown in Figure 4.1, the histogram and distribution of historical stock returns in Malaysia is presented. The mean of the distribution of stock returns in Malaysia is 0.20, which suggest that on average, the stock market increase by 20% per annum. However, the standard deviation of the distribution is 0.419, suggesting that the stock returns may range between 61.9% (i.e., 20% + 41.9%) and -21.9% (i.e., 20% – 41.9%) per annum. This suggest that the volatility of stock returns is moderate, indicating that among the South East Asia countries, Malaysia is often perceived as the defensive market. From the histogram, it is found that for most of the year, the stock returns in Malaysia are slightly positive. The distribution is not normally distributed. Instead, the distribution of stock returns in Malaysia exhibit fat tail characteristics suggesting that very positive or very negative abnormal returns could be more frequent in the Malaysia stock market as investors may perceive.

In Figure 4.2 below, the distribution of the changes of interest rates in Malaysia is shown. It is obvious that the changes of interest rates in Malaysia are not normally distributed. There are occasion of huge changes in interest rates. This is not surprising as the central bank of Malaysia may implement monetary policies aggressively in certain times for controlling monetary policies.

As shown in Figure 4.3, the histogram and distribution of historical stock returns in Indonesia is presented. The mean of the distribution of stock returns in Indonesia is 0.83, which suggest that on average, the stock market increase by 83% per annum. However, the standard deviation of the distribution is 1.815, suggesting that the stock returns may range between 264.5% (i.e., 83% + 181.5%) and -98.5% (i.e., 83% – 181.5%) per annum. This suggest that the volatility of stock returns is extremely high – i.e., the highest in among the South East Asia country. From the histogram, it is found that for most of the year, the stock returns in Indonesia are positive. The distribution is not normally distributed. Instead, the distribution of stock returns in Indonesia exhibit fat tail characteristics suggesting that very positive or very negative abnormal returns could be very frequent in Indonesia. The extremely volatile stock returns in Indonesia strongly suggest that this is the characteristics of stock market in an emerging country.

In Figure 4.4 below, the distribution of the changes of interest rates in Indonesia is shown. It is obvious that the changes of interest rates in Indonesia are not normally distributed. There are occasion of huge changes, both positive and negative changes in interest rates. This is not surprising as the central bank of Indonesia may implement monetary policies aggressively in certain times for controlling monetary policies. Particularly for a country such as Indonesia, the economy environment in that emerging country is famous for uncertainty, boom and bust and thus, often resulted in aggressive tightening or loosening of monetary policies in the nation.

As shown in Figure 4.5, the histogram and distribution of historical stock returns in Singapore is presented. The mean of the distribution of stock returns in Singapore is 0.23, which suggest that on average, the stock market increase by 23% per annum. However, the standard deviation of the distribution is 0.556, suggesting that the stock returns may range between 78.6% (i.e., 23% + 55.6%) and -32.6% (i.e., 23% – 55.6%) per annum. This suggests that the volatility of stock returns is moderate, when compared to the other emerging countries from South East Asia. As a developed nations, the stock returns in Singapore, is indeed less volatile. From the histogram, it is found that for most of the year, the stock returns in Singapore are slightly positive or negative. The distribution is not normally distributed. Instead, the distribution of stock returns in Singapore exhibit positive skewness, suggesting that better than average positive returns are not uncommon in Singapore.

In Figure 4.6 below, the distribution of the changes of interest rates in Singapore is shown. It is obvious that the changes of interest rates in Singapore are roughly normally distributed. From the changes of the interest rates, it can be seen that the economic environment in Singapore is not as volatile as in other emerging countries, such as the case previously discussed in Indonesia.

As shown in Figure 4.7, the histogram and distribution of historical stock returns in Philippines is presented. The mean of the distribution of stock returns in Philippines is 0.30, which suggest that on average, the stock market increase by 30% per annum. However, the standard deviation of the distribution is 0.637, suggesting that the stock returns may range between 93.7% (i.e., 30% + 63.7%) and -33.7% (i.e., 30% – 63.7%) per annum. This suggest that the volatility of stock returns is high, and investors may need to have the courage to stomach the bumpy ride along the changes in stock returns in investing in the stock market. From the histogram, it is found that some of the years may exhibit extremely positive returns. The distribution is not normally distributed. Instead, the distribution of stock returns in Philippines exhibit fat tail characteristics suggesting that very positive or very negative abnormal returns could be more frequent in the Philippines stock market as investors may perceive.

In Figure 4.8 below, the distribution of the changes of interest rates in Philippines is shown. It is observed that the changes of interest rates in Philippines are roughly normally distributed; except that the normal curve is flatter.

As shown in Figure 4.9, the histogram and distribution of historical stock returns in Thailand is presented. The mean of the distribution of stock returns in Thailand is 0.31, which suggest that on average, the stock market increase by 31% per annum. However, the standard deviation of the distribution is 0.419, suggesting that the stock returns may range between 97.2% (i.e., 31% + 66.2%) and -35.2% (i.e., 31% – 66.2%) per annum. This suggest that the volatility of stock returns is high, and investors may need to have the courage to stomach the bumpy ride along the changes in stock returns in investing in the stock market. From the histogram, it is found that for most of the year, the stock returns in Thailand are slightly positive. The distribution is not normally distributed. Instead, the distribution of stock returns in Thailand exhibit positive skewness.

In Figure 4.10 below, the distribution of the changes of interest rates in Thailand is shown. It is obvious that the changes of interest rates in Malaysia are not normally distributed. There are occasion of huge changes in interest rates. This is not surprising as the central bank of Malaysia may implement monetary policies aggressively in certain times for controlling monetary policies. Similarly to the situation of Indonesia, the economy environment in Thailand is famous for huge boom and bust and often resulted in aggressive tightening or loosening of monetary policies in the nation.

## 4.3 Scatter Plots between Stock Returns and Changes of Interest Rates

In this section, the scatter plot between stock returns and changes in interest rates in the different countries in South East Asia will be presented. In each of these scatter plot, stock returns of the respective countries will be presented as the dependent variables, while changes in interest rates will be employed as the independent variables.

In Figure 4.11 as follow, the scatter plot between stock returns and changes in interest rates in Malaysia are shown. From the scatter plot, it is found that changes in interest rates are positively related to stock returns in Malaysia. The R^{2} of the regression is 0.036. This suggests that the changes of interest rates in Malaysia can only explain a total of 3.6% of the variation in stock returns. The positive relationships between interest rates and stock returns, however, are surprising. In theory, when interest rates increase, stock returns should decrease, as investors would be able to allocate more of their money to bonds for better yield. However, there are also reasons for findings positive relationships between interest rates and stock returns. In a booming economy, the government tends to increase interest rates gradually. At the similar time, the stock returns tend to be positive due to the booming in economy. As such, over the long term, when annual data for both interest rates and stock returns are used, investors may observe positive relationships between the two variables. Overall, this suggests that interest rates may not be easily used as the predicting variable to time the stock returns in Malaysia. However, when interest rates is increased, but the stock returns decreases as a results, investors can then bet that the stock returns will experience reversion to means as long as the economy is booming, since from historical perspectives, there is simply no evidences that stock returns are negatively or inversely related to changes in interest rates.

In Figure 4.12 as follow, the scatter plot between stock returns and changes in interest rates in Indonesia are shown. From the scatter plot, it is found that changes in interest rates are positively related to stock returns in Indonesia. The R^{2} of the regression is 0.062. This suggests that the changes of interest rates in Indonesia can explain a total of 6.2% of the variation in stock returns. Similar to the case in Malaysia, the positive relationships between interest rates and stock returns are surprising. As discussed previously, when interest rates increase, stock returns should decrease, as investors would be able to allocate more of their money to bonds for better yield. The reasons used to explain the positive relationships between interest rates and stock returns in Malaysia can be employed to explain the observation in Indonesia as well. Specifically, in a booming economy, the government tends to increase interest rates gradually. At the similar time, the stock returns tend to be positive due to the booming in economy. As such, over the long term, investors may observe positive relationships between the two variables. The impact of such observation is as follow. In situation whereby interest rates are increased, causing the stock returns to decreases; investors can bet that the stock returns will experience reversion to means as long as the economy is booming. This is because from historical perspectives, there are simply no evidences that stock returns are negatively or inversely related to changes in interest rates in Indonesia.

In Figure 4.13 as follow, the scatter plot between stock returns and changes in interest rates in Singapore are shown. From the scatter plot, it is found that changes in interest rates are inversely related to stock returns in Singapore. The R^{2} of the regression is 0.01. This suggests that the changes of interest rates in Singapore can only explain a total of 1.0% of the variation in stock returns. The negative relationships between interest rates and stock returns are consistent with theory. It can be concluded that the investors from Singapore is rational – as there are evidences that when interest rates are increased, there are some signs that stock returns decrease as investors may pull out from the stock market to invest in bond. However, due to the low The R^{2} of the regression, such argument is not conclusive. Overall, this suggests that interest rates may not be easily used as the predicting variable to time the stock returns in Malaysia.

In Figure 4.14 as follow, the scatter plot between stock returns and changes in interest rates in Philippines are shown. From the scatter plot, it is found that the regression line between interest rates and stock returns is flat. Apparently, changes in interest rates are not related to stock returns in Philippines.

In Figure 4.15 as follow, the scatter plot between stock returns and changes in interest rates in Thailand are shown. From the scatter plot, it is found that changes in interest rates are positively related to stock returns in Thailand. The R^{2} of the regression is 0.024. This suggests that the changes of interest rates in Thailand can only explain a total of 2.4% of the variation in stock returns. The positive relationships between interest rates and stock returns are consistent with findings in Malaysia and Indonesia. As explain before, it is possible that under a booming economy, the government tends to increase interest rates gradually. At the similar time, the stock returns tend to be positive due to the booming in economy. As such, over the long term, when annual data for both interest rates and stock returns are used, investors may observe positive relationships between the two variables.

Then, as argued before, the impact of such finding is that when interest rates is increased in Thailand, but the stock returns decreases as a results, investors can then bet that the stock returns will experience reversion to means as long as the economy is booming, since from historical perspectives, there is simply lacking of evidences supporting the notion that stock returns are negatively or inversely related to changes in interest rates.

## 4.4 Correlation between Stock Returns and Changes of Interest Rates

In Table 4.2, the correlations between research variables are presented. The research variables include both the changes in interest rates as well as stock returns for the following countries, Malaysia, Indonesia, Singapore, Philippines and Thailand. In the following table, the correlation coefficients between changes in interest rates and the stock returns for the respective countries are highlighted in yellow. Then, the relationships between stock returns of different countries that exhibit statistically significant correlation are highlighted in green. Lastly, the relationships between changes of interest rates in different countries that exhibit statistically significant correlation are highlighted in orange.

As shown in Table 4.2 above, it is found that correlation coefficients between changes of interest rates to stock returns in the respective countries are not statistically significant. In other words, there are no evidences supporting the notion that changes in interest rates are related to stock returns. Furthermore, the sign of the correlation coefficient between changes of interest rates to stock returns in the respective countries are not consistent. For this, the correlation coefficients between changes of interest rates to stock returns in the respective countries, namely, Malaysia, Thailand, Indonesia and Philippines are positive. From all of the South East Asia countries being studied, only the correlation coefficient between changes of interest rates to stock returns in Singapore is negative. For this, it is suggested that investors in Singapore is perhaps more rational. However, as none of the correlation coefficient is statistically significant, such an assertion is not conclusive.

Then, it is found that instead of discovering statistically relationships between changes of interest rates to stock returns in the different countries, it is found that the stock returns of the different countries are indeed statistically significantly and positively related to each others. In other words, the stock returns of these countries tend to move in tandem. There are strong evidences that systematic forces are indeed affecting all of the stock returns in South East Asia simultaneously. As shown in the table, the correlation coefficient between stock returns in Indonesia and Malaysia is 0.547 at 10% confidence interval. Then, the correlation coefficient between stock returns in Singapore and Malaysia is 0.762 at 5% confidence interval. In a similar manner, correlation coefficient between stock returns in Philippines and Malaysia is 0.724 at 5% confidence interval; correlation coefficient between stock returns in Thailand and Malaysia is 0.751 at 5% confidence interval; correlation coefficient between stock returns in Philippines and Indonesia is 0.567 at 5% confidence interval; correlation coefficient between stock returns in Thailand and Indonesia is 0.675 at the 5% confidence interval; correlation coefficient between stock returns in Philippines and Singapore is 0.463 at 10% confidence interval; correlation coefficient between stock returns in Thailand and Singapore is 0.730 at 5% confidence interval; and lastly, correlation coefficient between stock returns in Thailand and Philippines is 0.615 at 5% confidence interval.

Then, surprisingly, it is also found that the changes of interest rates seem to move in tandem among the countries being studied. There are empirical evidences showing that the central banks of the countries implement similar monetary policies, from the observation that interest rates tend to change in tandem with each others in these countries. Specifically, there are five pairs of statistically significant correlation between changes of interest rates among the countries being studied. To explain, correlation coefficient between changes of interest rates in Malaysia and Indonesia is 0.504 at 10% confidence interval; correlation coefficient between changes of interest rates in Malaysia and Singapore is 0.490 at 10% confidence interval; correlation coefficient between changes of interest rates in Malaysia and Philippines is 0.433 at 10% confidence interval; and lastly the correlation coefficient between changes of interest rates in Malaysia and Indonesia is 0.814 at 5% confidence interval.

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