Please read (1) the Module Descriptor of the MBA Management Project and (2) Management Project Hints and
Tips, in the MBA Handbook (Sections D and E, respectively)
The template is structured to provide you a skeleton and back bone to your chapters 1 to 3 of your management project i.e. Introduction, Literature Review and methodology.
(ID) Programme MBA Finance
Proposed Title The effect of foreign portfolio investment on financial asset prices in Malaysia.
The study aims to identify the effect of foreign portfolio investments on financial asset prices in Malaysia for the period between 2003 and 2013. The history of capital controls in Malaysia is one that is mixed with different incentives and motives. After the 1970s a number of free market economies succeeded in persuading other economies that capital controls were harmful and that they ought to abandon them and encourage financial globalization.
However, Malaysia employed capital controls in the late 1990s and though they did not have an adverse effect, in 2005 the exchange rates and capital flow policies became fully liberalized. The capital controls were removed and the pegged ringgit was lifted in 2015 and changed to a managed- float system however, the ringgit remained non- internationalized. There are a number of benefits in international capital flows especially if the inflows are for investment purposes such as the promotion of economic development, higher investments in the host countries, additional capital stock that contributes to economic growth and also an advanced production technology (Bosworth, Barry P. & M. Collins, 2003, p.75).
Portfolio investment is undertaken by the investors with the main expectation of earning a return that is always correlated with their expected risk. Portfolio investments cover transactions in both debt and equity securities. A portfolio is a combination of assets that an investor holds. An optimal portfolio is one in which the investor always wants to achieve because it yields a high return for any risk level.
Financial assets on the other hand, are assets that are owned by the company and are regarded as intangible in nature, they are derived from a contractual claim and include, bank deposits, and stocks and bonds. They can usually be traded on financial markets. An investor usually makes a choice as to the form of saving he will opt to use depending on the risk and return of each form of asset. Asset prices are also vital as they provide key economic information that is required when making investment and consumption decisions.
Investment in assets usually involves risk and since this risk is correlated to the predictability of the outcome it becomes a key statistical concept. The predictability of a security is not always a sign of market failure because a high risk security can as well result to a high return to the investor in the long run.
The study seeks to identify the effect of foreign portfolio investments on financial asset prices such as equities, exchange rates and bond yields in the economy.
Many countries turn to foreign capital flows to fund the shortfall in capital requirement to boost domestic economic growth through Foreign direct investment (FDI) or Foreign portfolio investment (FPI). FDI relates to direct foreign investment in domestic productive assets while FPI refers to foreign investments in domestic financial assets like bond, equities and currencies.
It is important to note that FDI is more difficult to pull out or sell off and the direct investors may be more committed to managing their international investments, but less likely to pull out at the first sign of trouble. On the other hand, FPI represents the passive holdings of securities such as foreign stocks, which entail active management or control of the securities' issuer by the investor.
Unlike FDI, it is very easy to sell off the securities and pull out the foreign portfolio investment. Hence, FPI can be much more volatile than FDI. FPI can bring about rapid development, helping an emerging economy move quickly to take advantage of economic opportunity, creating many new jobs and significant wealth. However, when a country's economic situation takes a downturn, sometimes just by failing to meet the expectations of international investors, the large flow of money into a country can turn into a stampede away from it.
In Malaysia for example the amount of FPI increased from USD 7.8 billion to USD 8.7 billion and this is an indication of the investor confidence in the economy.
This encouraging trend is also an indication of the government to instill the investor confidence in the Malaysian markets. The Central Bank of Malaysia also plays a fundamental role in enhancing foreign portfolio investment. Research
This study asks the following research question:
1)Does foreign portfolio investment affect financial asset prices in emerging markets such as Malaysia?
This study aims to:
Examine profoundly the effect of foreign portfolio investment in the financial asset prices in the Malaysian economy.
The study will look at nominal exchange rates, equity and bond yields and how they are affected by the inflow of foreign portfolio investments into the country.
This study is essential because it helps to fill the gap that was formed by the different scholars who also played a role in seeking to understand the effects of a foreign portfolio investment on the levels of financial assets in the Malaysian economy specifically.
Therefore this study will seek to provide an overview of the different expected results that are required to provide a basis for decision making purposes.
This study will also seek to establish questions on the different asset prices in the market and how effectively they contribute to the problem under study. The researcher will seek to utilize each asset price and establish its relationship with the dependent variables and thus form a framework for the study.
Brief Literature Review
THE THEORETICAL REVIEW.
There are various theories that were proposed on the framework of the portfolios, this includes the modern portfolio theory, the prospect theory and the arbitrage pricing theory.
The modern portfolio theory suggests that investors usually derive their utility from their wealth. Investors are also regarded as risk averse. The theory also makes use of a model that is simple and that utilizes the asset pricing and allocation. Therefore according to the theory only the risk free rate, the beta coefficients and the expected returns on the market are used to determine the investors expected return. There were ways that utility forms changed with the wealth of the investor (Markowitz, 1952b, p.5238). Utility is the level or the amount of satisfaction of a consumer that he derives by consuming a number of goods. It is measured by the indifference curve, a curve that measures the level of satisfaction between two goods that yield the same utility to the consumer (Modigliani &Modigliani, 1997, p.783).
To maximize the satisfaction or the utility of an investor, all the investors would require splitting their combination of assets between their risk free rates, according to their levels of attitudes and their assets in the market. Some of the investors are risk averse; others are risk takers while at the same time there are the risk neutral investors.
The prospect theory on the other hand proposes that the modern portfolio theory failed because it did not effectively mention the essential reference points. The theory as postulated therefore combined and added more models to explain the behavior of the investor more effectively.
A number of scholars have attempted to validate on the effects of portfolio investments and financial asset prices and other variables that affect the general operations of the economy in general.
Sarno and Taylor (2003) conducted a research to examine whether asset price bubbles are related to the large capital flows into Latin America. The results of the study concluded that there was a strong existence of the stock prices bubbles in the region.
Berument and Dincer (2004) analyzed the relationship between the amount of capital inflows and outflows and macroeconomic performance in Turkey between the years 1992-2001. It was concluded that positive innovation in capital inflows normally will lead to currency appreciation and declining in the general interest rates in the short run.
Duasa and Kassim (2009) conducted a research to establish the relationship between foreign portfolio investment and the real gross domestic product (GDP). The results of the study indicated that economic performance is a great actor that attracts FPI in a country.
Brana, Djigbenou and Prat (2012) conducted a research to identify the effect of global liquidity on asset prices. They conducted the research by the use of vector model and the results of the research indicated that there is a strong spillover effect on output and the general price level.
Biekpe and Gossel (2012) analyzed the effect of capital in South Africa and the results indicated that portfolio stock of investments increases the level of exchange rates and decreases the level of interest rates.
Gumus, Duru and Gungur (2013) sought to analyze the relationship between foreign portfolio investment and some of the main macroeconomic variables under study and they concluded that foreign portfolio investment have an effect on the level of the stock market and the level of the exchange rates.
Beyazit (2014). Most recently this researcher sought to analyze the relationship between portfolio investments and the asset price relationships in Turkey. He concluded that portfolio investment has a considerable and steady impact on the level of exchange rate but there are no portfolio flows observed on the stock market and the level of interest rates.
FINANCIAL ASSET PRICES
FOREIGN PORTFOLIO INVESTMENT
The hypotheses of this study are
H0: Foreign Portfolio Investment has no effect on financial asset prices in Malaysia
H1: Foreign Portfolio Investment affects financial asset prices in Malaysia
Model or Equation,
The most common way to test the causal relationship between two variables is the Granger-Causality. This is the method the research will employ, the test involves estimating the simple vector auto regressions (VAR) shown below:
Xt=in=1aYt-i+jn=1bjXt-j+U1t Equation 1
This denotes both equation 1 and 2, with equation 1 showing that variable X is affected by the variable Y and equation 2 represents similar results that variable Y is affected by the lagged variable X.
The Granger-Causality means the lagged Y influence X significantly in equation 1 and the lagged X influence Y significantly in equation 2.
It is possible to test whether the estimated lagged coefficients Sai and Slj are different from zero with F- statistics. When the jointly test reject the two null hypotheses that Sai and Slj both are not different from zero, causal relationships between X and Y are confirmed.
The advantage of the Grander- Causality test is that it is simple to understand and easy to carry out and it is also not ambiguous. However, the traditional Grander Causality tests have its limitations:
A two variable test that does not consider the other variables is usually subject to systematic bias (Gujarati, 1995, p.738)
Time series data being non-stationary is a major limitation because it could lead to the elements of wrongly stipulated regressions (Maddala, 2001, p.48).
F test is not always applicable and...
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