Testing for Unit Roots and Structural Breaks in Malaysia Unanticipated Macroeconomic Variables

Abstract

The objective of this study is to execute a comprehensive analysis of the unit root test and structural break in Malaysia unanticipated macroeconomic variables from January 2009 to December 2016 using an endogenous structural break. The findings obtained by using conventional regression methods without testing for the unit root in time series data might be misleading. The empirical results from the Zivot-Andrews model, which endogenously identifies the most significant structural breaks in each of the macroeconomic variables, clearly show that the null hypothesis of at least one-unit root could be rejected for some of the variables under investigation. Some of the variables, which contain a unit root based on the conventional unit root test, become stationary after considering the existence of potential structural breaks in the series. The results are statistically significant, and the endogenous structural breaks identified using this methodology also coincides with periods of major economic shocks to the Malaysia economy. The estimated break dates correspond closely with the expected dates associated with the changes in the government economic policy and the effect of the European Debt Crisis as well as the oil price shock in 2011 which resulted in a significant shift in Kuala Lumpur Composite Index (KLCI) from 1389 point (September 2011) to 1492 point (October 2011). An analysis of the structural breakpoint of these variables suggests that the Malaysia stock market has gone through a structural change after October 2011. The policymakers can use historical information to forecast future movements in macroeconomic time series.