2014 Effect of Exchange Rate Volatility On Industry Trade Flows Between Malaysia and China

This article was downloaded by: [Universiti Sains Malaysia]
On: 15 November 2014, At: 23:34

Publisher: Routledge
Informa Ltd Registered in England and Wales Registered Number: 1072954
Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH,
UK
The Journal of International

Trade & Economic Development:
An International and
Comparative Review
Publication details, including instructions for authors
and subscription information:
http://www.tandfonline.com/loi/rjte20
Effect of exchange rate volatility

on industry trade flows between
Malaysia and China
a
Abdorreza Soleymani & Soo Y. Chua
Economics Programme, School of Social Sciences,

Universiti Sains Malaysia, Penang, Malaysia
Published online: 10 Jun 2013.
To cite this article: Abdorreza Soleymani & Soo Y. Chua (2014) Effect of exchange
rate volatility on industry trade flows between Malaysia and China, The Journal of
International Trade & Economic Development: An International and Comparative Review,
23:5, 626-655, DOI: 10.1080/09638199.2013.803146
To link to this article: http://dx.doi.org/10.1080/09638199.2013.803146
PLEASE SCROLL DOWN FOR ARTICLE

Taylor & Francis makes every effort to ensure the accuracy of all the
information (the Content) contained in the publications on our platform.
However, Taylor & Francis, our agents, and our licensors make no
representations or warranties whatsoever as to the accuracy, completeness, or
suitability for any purpose of the Content. Any opinions and views expressed
in this publication are the opinions and views of the authors, and are not the
views of or endorsed by Taylor & Francis. The accuracy of the Content should
not be relied upon and should be independently verified with primary sources
of information. Taylor and Francis shall not be liable for any losses, actions,
claims, proceedings, demands, costs, expenses, damages, and other liabilities
whatsoever or howsoever caused arising directly or indirectly in connection
with, in relation to or arising out of the use of the Content.
Downloaded by [Universiti Sains Malaysia] at 23:34 15 November 2014
This article may be used for research, teaching, and private study purposes.
Any substantial or systematic reproduction, redistribution, reselling, loan, sublicensing, systematic supply, or distribution in any form to anyone is expressly
forbidden. Terms & Conditions of access and use can be found at http://
www.tandfonline.com/page/terms-and-conditions
The Journal of International Trade & Economic Development, 2014

Vol. 23, No. 5, 626655, http://dx.doi.org/10.1080/09638199.2013.803146
Effect of exchange rate volatility on industry trade flows

between Malaysia and China
Abdorreza Soleymani and Soo Y. Chua

Economics Programme, School of Social Sciences, Universiti Sains Malaysia,
Penang, Malaysia
(Received 1 August 2012; final version received 3 May 2013)
This paper investigates the impact of ringgit/yuan volatility on Malaysian
trade with her largest trading partner, China. The short- and long-run impacts
are estimated using bounds testing approach to cointegration analysis and
disaggregated bilateral trade data by industry over the period of 19852010.
Specifically, we considered a total of 151 importing and 24 exporting industries
in Malaysia that traded with China. Our finding indicates that cointegration
existed in 94 Malaysian import industry models and 16 Malaysian export
industry models. Among these cases, exchange rate volatility has short-run
effects on majority of the models. However, the short-run effects shift into
the long-run effects in 46 out of 69 industries in import models and 5 out
of 10 industries in export models. Results indicate that the exchange rate
uncertainty has positive effects on majority of these industries.
Keywords: Malaysia; China; exchange rate volatility; industry trade data;
cointegration
JEL Classifications: F10, F14, F 31
1. Introduction
The exchange rate uncertainty is known to have a strong influence on the volume of international trade. However, there is still no consensus on whether increases in exchange rate volatility will increase or decrease the volume of trade.
The empirical evidences tend to be inconclusive, as some studies have found that
the exchange rate volatility to have negative effects on trade, while others found
the effect to be positive. The first group of studies argued that exchange rate
uncertainty increases risks, and risk-averse buyers and sellers who face possible
losses due to exchange rate fluctuations will eventually reduce their trade transactions. There is a large body of theoretical and also empirical literature such as
Clark (1973), Baron (1976), Hooper and Kohlhagen (1978), Poon, Choong, and
Habibullah (2005), Thorbecke (2008), Haile and Pugh (2011), Mukherjee and
Corresponding author. Email: abdorrezasoleymani@yahoo.com

C 2013 Taylor & Francis
The Journal of International Trade & Economic Development
627
Pozo (2011), and Haile and Pugh (2013), who found that exchange rate volatility
has an adverse effect on international trade. On the other hand, exchange rate uncertainty could also influence highly risk-averse exporters to increase their exports
in order to raise their marginal utility of export revenue. For example, De Grauwe
(1987), Viaene and de Vries (1992), Franke (1991), and Broll and Eckwert (1999)
have theoretically explained the positive effect, while Bredin, Stilianos, and Murphy (2003), and Hsu and Chiang (2011) have tested this assumption and found that
it has a positive effect. Finally, some studies have also concluded that exchange
rate volatility has no apparent impact on international trade (see Willett 1986; De
Vita and Abbott 2004; Caglayan and Jing 2010).
For developing countries, this issue is relatively more important due to the
lack of forward or future markets for foreign exchange rate, which could provide
those engaging in foreign trade with the opportunity to hedge their currency risks
in the situations of fluctuating exchange rates (Ohr 1991). This situation is more
notable for the developing countries in East Asian because these countries have
been extremely dependent on international trade. Recently, Chit and Judge (2011)
examined the role of financial sector development in influencing the impact of
exchange rate volatility on the exports in five developing countries in East Asia.
They found that exchange rate volatility effects on exports depend on the level of
financial sector development in these countries. The exchange rate volatility has a
more adverse effect on the economy that is less financially developed.1
East Asia region is recognized as an important global production and trading
network. Multinational companies located in Hong Kong, Japan, South Korea,
Taiwan, and advanced countries in the Association of Southeast Asian Nations
(ASEAN) produced high technology-intensive intermediate goods and capital
goods to be sent to China and other parts of ASEAN countries for assembly by
lower-skilled workers. The finished products are then exported throughout the
world (Thorbecke 2008). This trading network has led to the increase in intraregional trade, especially in parts and component trade within the region.
Since the emergence of China as a major exporter of manufactured goods in
the 1990s, the external trade of Malaysia as a member of international production
networks in East Asia has also become more region oriented and the share of total
trade with these countries has increased, especially with China. More precisely,
along with Chinas strong economy growth bilateral trade between Malaysia and
China has experienced a rapid growth over the last two decades. Today, China
is the Malaysias largest trading partner, moving up from 11th spot in 1990, and
Malaysia is also the Chinas largest trading partners among ASEAN countries.2
Malaysia has been repositioning its industrial sector toward the production
of high technology-intensive goods. Similar to most of economies in the region,
Malaysia has comparative advantage in exporting manufactured products, especially in electrical and electronics (E&E) industries. However, in-line with the
increased production integration, Malaysia also imports goods in the similar categories that it has a comparative disadvantage. Bilateral trade with China in the E&E
industries has risen to 47% of total Malaysian imports and 51% of total exports
628
A. Soleymani and S.Y. Chua
Figure 1. Real ringgit/yuan volatility.

Source: International Monetary Fund, International Financial Statistics.
in 2010.3 As a result of this, intra-industry trade contributed to a relatively large

percentage of the bilateral trade between these two countries. The E&E industry is
the leading sector in Malaysias manufacturing that contributes strongly to export
earnings, investment, and employment. This implies that trade with China plays a
crucial role in the Malaysian economy.
The long-run behavior of Malaysias ringgit against Chinese yuan indicates that
the Malaysian ringgit is a volatile currency. As shown in Figure 1, three distinct periods can be observed. In the first period from 19851996, the degree of exchange
rate volatility was relatively high. However, during the Asian financial crisis in
19971998, the ringgit/yuan real exchange rate was extremely volatile after the
devaluation of the ringgit in 1997. The volatility subsided after the ringgit was
pegged to the US dollar in 1998. The ringgit/yuan real exchange rate were relatively
stable from 19992005, but begins to increase after the peg was removed in July
2005 and when the ringgit depreciated during the global financial crises in 2008.
There are ample theoretical and empirical studies about exchange rate volatility effect on the trade volume.4 Since this study concentrates on Malaysia, we
will highlight some of the recent studies that investigated the effect of exchange
rate volatility on export volume in Malaysia (i.e. Doroodian 1999; Arize, Osang,
and Slottje 2000; Sauer and Bohara 2001; Doganlar 2002; Wong and Tang 2008;
Thorbecke 2008; Hayakawa and Kimura 2009; Chit, Rizov, and Willenbockel
2010).5
Doroodian (1999) estimated the effect of exchange rate volatility on the export volume of three developing countries, mainly India, Malaysia, and South
Korea. He found that the Generalized Autoregressive Conditional Heteroskedasticity (GARCH)-based measurement of exchange rate volatility had a significantly negative impact on the exports in all the three countries. Arize, Osang, and
629
Slottje (2000) investigated the relationship between exchange rate uncertainty and
export volume by employing Johansens cointegration technique on 13 developing
countries, including Malaysia. The results reveal that in the case of Malaysia exchange rate uncertainty has a significantly negative impact on the export volume.
Doganlar (2002) also included Malaysia and four other developing countries in
his study on the effect of exchange rate volatility on export volume. He used
quarterly data and the EngleGranger approach to cointegration. He found a negative effect of exchange rate volatility on export volume in every country. Wong
and Tang (2008) examined the effects of exchange rate volatility on the demand
for Malaysias top five electrical exports using the autoregressive distributed lag
(ARDL) approach to cointegration. Their results indicate that Malaysias electrical
exports were influenced by negative exchange rate variability effect.
Unlike the previous studies, Sauer and Bohara (2001) used panel data to study
the exchange rate volatility and exports nexus. They found that the exports of
less developed countries (including Malaysia) are adversely affected by exchange
rate volatility while the exports of developed countries are not affected.6 Similar
to Sauer and Bohara (2001), recent studies by Thorbecke (2008), Hayakawa and
Kimura (2009), and Chit, Rizov, and Willenbockel (2010) also employed the panel
data techniques to investigate the relationship between exchange rate volatility and
international trade. However, these studies focused more on East Asian countries
by using different groups of countries, sample periods, and products. Thorbecke
(2008) focused on how exchange rate volatility affects electronic parts and components exports within East Asia and found that volatility does reduce trade in
electronic parts and components within the region. Hayakawa and Kimura (2009)
examined whether there are differences in the impact of the exchange rate volatility
on trade in finished machinery goods and in machinery parts. They discovered that
in international production networks, trade in intermediate goods, which represent
a significant fraction of East Asian total trade, is relatively sensitive to exchange
rate volatility when compared with other types of trade. Using the similar approach, Chit, Rizov, and Willenbockel (2010) examined bilateral real exchange
rate volatility impact on real exports for five emerging East Asian countries. They
investigated this effect among the five countries and between the five countries and
13 of their industrialized trading partners. Their results indicated that exchange
rate volatility has a statistically significant negative impact on exports.
From the literature, there is no study that investigated the effects of exchange
rate volatility specifically on trade between Malaysian and China. In addition, most
of the earlier studies mentioned above suffered from aggregation bias due to the use
of aggregated data. To account for this deficiency and to fill the gap in the literature,
this study will investigate the effect of real ringgit/yuan volatility on Malaysia
China trade flows by using the disaggregated industry imports and exports data
over the period of 19852010. We take into consideration 151 Malaysian import
and 24 Malaysian export industries, which contributed about 79.2% and 56.5% of
total Malaysian import and export from China, respectively, in 2010 (see Table 1).
630
Table 1.

List of exporting and importing industries under study.
Export
Code
Industry name
014
Meat and edible offals, prep./pres.,

fish extracts
Milk and cream
Fish, fresh (live or dead), chilled or
frozen
Crustaceans and mollusks, fresh,
chilled, frozen, etc.
Fish, crustaceans, and mollusks,
prep./pres.
Rice
Other cereal meals and flours
Cereal prep. and preps. of flour of
fruits or vegetables
Vegetable, fresh chilled,
frozen/pres., roots, tubers
Vegetable, roots, and tubers,
prep./pres., n.e.s.
Fruits and nuts (not incl. oil nuts),
fresh or dried
Fruit, pres., and fruit preps.
Sugar and honey
Sugar confectionery and other sugar
preps.
Cocoa
Tea and mate
Spices
Feedstuff for animals (not incl.
unmilled cereals)
Edible products and preps., n.e.s.
Nonalcoholic beverages, n.e.s.
Alcoholic beverages
Oil seeds and oleaginous fruits,
whole or broken
Oils seeds and oleaginous fruits,
whole or broken
Natural rubber latex; nat. rubber and
simply nat. gums
Wood in rough/squared
Wood, simply worked, and railway
sleepers of wood
Cotton
Synthetic fibers suitable for spinning
Stone, sand, and gravel
Other crude minerals
Ores and concentrates of base
metals, n.e.s.
025
034
036
037
042
047
048
054
056
057
058
061
062
072
074
075
081
098
111
112
222
223
232
247
248
263
266
273
278
287
Industry
selected
Import
Trade
share
Industry
selected
0.31
Trade
share
0.04
0.0004
0.3
0.78
0.09
0.002
0.03
0.09
1.65
0.19
0.5
0.19
0.13
0.04
0.03
0.34
0.21
0.22
0.002
0.06
0.07
0.02
4.36
0.41
0.32
0.06
0.02
0.02
0.29
0.04
(continued)

Table 1.
(Continued).
Export
Code
Industry name
291
292
323
Crude animal materials, n.e.s.

Crude vegetable materials, n.e.s.
Briquettes; coke and semi-coke of
coal, lignite/peat
Petroleum products, refined
Residual petroleum products, n.e.s.
and related materials
Fixed vegetable oils, soft, crude,
refined/purified
Other fixed vegetable oils, fluid or
solid, crude
Animal and vegetable oils and fats,
processed and waxed
Hydrocarbons, n.e.s, their halogens,
and derivatives
Alcohols, phenols, phenol-alcohols,
and their derivatives
Carboxylic acids, their anhydrides,
halides, etc.
Nitrogen-function compounds
Organoinorganic and heterocyclic
compounds
Other organic chemicals
Inorganic chemical elements,
oxides, and halogen salts
Other inorganic chemicals
Synthetic organic dyestuffs, nat.
indigo and color lakes
Pigments, paints, varnishes, and
related materials
Medicinal and pharmaceutical
products
Essential oils, perfume, and flavor
materials
Perfumery, cosmetics, and toilet
preparations
Soap, cleansing and polishing
preparations
Fertilizers, manufactured
Explosives and pyrotechnic products
Condensation, polycondensation,
and polyaddition products
Polymerization and
copolymerization products
334
335
423
424
431
511
512
513
514
515
516
522
523
531
533
541
551
553
554
562
572
582
583
631
Industry
selected
Import
Trade
share
Industry
selected
0.02
9.9
1.55
0.004
0.29
0.05
0.58
0.06
0.03
0.01
3.1
Trade
share
0.34
0.21
0.12
0.34
0.34
0.58
0.15
0.54
1.21
0.16
0.27
0.68
0.02
0.28
0.13
0.88
0.01
0.81
0.61
(continued)
632
Table 1.

(Continued).
Export
Code
Industry name
584
Regenerated cellulose; cellulose

nitrate, etc.
Disinfectants, insecticides,
fungicides, weed killers
Starches, insulin, and wheat gluten;
albuminoidal subst.
Miscellaneous chemical products,
n.e.s.
Materials of rubber (e.g. pastes,
plates, sheets, etc.)
Rubber tires, tire cases, etc. for
wheels
Articles of rubber, n.e.s.
Cork manufactures
Veneers, plywood, improved or
reconstituted wood
Wood manufactures, n.e.s.
Paper and paperboard
Paper and paperboard, cut to size or
shape
Textile yarn
Cotton fabrics, woven
Fabrics, woven of manmade fiber
Textile fabrics, woven, other than
cotton/manmade fiber
Knitted or crocheted fabrics
Tulle, lace, embroidery, ribbons, and
other small wares
Special textile fabrics and related
products
Made-up articles, wholly/chiefly of
textile materials
Floor coverings, etc.
Lime, cement, and fabricated
construction materials
Clay construction materials and
refractory construction materials
Mineral manufactures, n.e.s.
Glass
Glassware
Pottery
Pearls, precious and semi-precious
stones, unworked/worked
Pig iron, spiegeleisen, sponge iron,
iron or steel
591
592
598
621
625
628
633
634
635
641
642
651
652
653
654
655
656
657
658
659
661
662
663
664
665
666
667
671
Industry
selected
Import
Trade
share
Industry
selected
4.75
0.17
0.32
0.01
Trade
share
0.05
0.2
0.18
0.5
0.02
0.18
0.17
0.0006
0.28
0.16
0.71
0.37
0.46
0.24
0.37
0.08
0.21
0.04
0.26
0.21
0.08
0.15
0.26
0.24
0.26
0.18
0.07
0.02
0.21
(continued)

Table 1.
(Continued).
Export
Code
Industry name
674
Universals, plates and sheets of iron

or steel
Iron/steel wire, whether/not coated,
but not insulated
Tubes, pipes, and fittings of iron or
steel
Iron and steel castings, forgings, and
stampings; rough
Copper
Aluminum
Tin
Structures and parts of iron, steel,
aluminum
Wire products and fencing grills
Nails, screws, nuts, bolts, etc. of
iron, steel, copper
Tools for use in hand or in machines
Cutlery
Household equipment of base metal,
n.e.s.
Manufactures of base metal, n.e.s.
Steam and other vapor-generating
boilers and parts
Internal combustion piston engines
and parts
Rotating electric plant and parts
Agricultural machinery and parts
Tractors fitted or not with power
take-offs, etc.
Textile and leather machinery and
parts
Paper and pulp mill machines,
machines for manufacture of paper
Printing and bookbinding machines
and parts
Food processing machines and parts
Machines and equipments
specialized for particular industry
Machines tools for working metal or
metal carb. parts
Metal working machinery and parts
Heating and cooling equipment and
parts
677
678
679
682
684
687
691
693
694
695
696
697
699
711
713
716
721
722
724
725
726
727
728
736
737
741
633
Industry
selected
Import
Trade
share
Industry
selected
0.05
0.04
Trade
share
1.5
0.18
0.75
0.18
0.75
1.27
0.04
0.25
0.12
0.84
0.27
0.11
0.21
1.47
0.19
0.28
1.52
0.1
0.09
0.23
0.25
0.14
0.13
1.47
0.65
0.33
0.96
(continued)
634
Table 1.

(Continued).
Export
Code
Industry name
742
Pumps for liquids, liquids elevators,

and parts
Pumps and compressors, fans and
blowers, centrifuges
Mechanical handling equipments
and parts
Other nonelectrical machine tools,
apparatus, and parts
Nonelectric parts and accessories of
machines
Office machines
Parts of and accessories suitable for
751 or 752
Radio-broadcast receivers
Telecommunication equipment and
parts
Electric power machinery and parts
there of
Electric app. such as switches,
relays, fuses, plugs, etc.
Equipment for distributing
electricity
Thermionic, cold and photo-cathode
valves, tubes, parts
Electrical machinery and apparatus,
n.e.s.
Parts and accessories of 722, 781,
782, 783
Motorcycles, motor scooters, invalid
carriages
Trailers and other vehicles, not
motorized
Sanitary, plumbing, heating, lighting
fixtures
Furniture and parts thereof
Travel goods, handbags, briefcases,
purses, sheaths
Outer garments, mens, of textile
fabrics
Outer garments, womens, of textile
fabrics
Under garments of textile fabrics
Outer garments and other articles,
knitted
743
744
745
749
751
759
762
764
771
772
773
776
778
784
785
786
812
821
831
842
843
844
845
Industry
selected
Import
Trade
share
0.002
Industry
selected
0.03
2.07
26.29
Trade
share
0.23
1.06
0.69
0.52
1.2
0.57
7.79
0.09
11.15
1.66
3.72
1.02
9.4
2.83
0.5
0.36
0.15
0.28
0.75
0.38
0.10
0.2
0.03
0.13
(continued)

Table 1.
(Continued).
Export
Code
Industry name
846
Under garments, knitted or

crocheted
Clothing accessories of textile
fabrics
Art. of apparel and clothing
accessories, no textile
Footwear
Optical instruments and apparatus
Medical instruments and appliances
Meters and counters, n.e.s.
Measuring, checking, analyzing
instruments
Photographic app. and equipment,
n.e.s.
Photographic and cinematographic
supplies
Optical goods, n.e.s.
Watches and clocks
Printed matter
Articles of materials described in
division 58
Baby carriages, toys, games, and
sporting goods
Office and stationery supplies, n.e.s.
Works of art, collectors pieces, and
antiques
Jewelry, goldsmiths, and other art.
of precious m.
Musical instruments, parts, and
accessories
Other miscellaneous manufactured
articles
847
848
851
871
872
873
874
881
882
884
885
892
893
894
895
896
897
898
899
Total
635
Industry
selected
Import
Trade
share
Industry
selected
0.07
2.06
0.03
0.26
24
56.51
151
Trade
share
0.22
0.09
0.06
0.60
0.57
0.27
0.04
1.28
0.11
0.14
0.55
0.28
0.04
1.08
0.72
0.18
0.02
0.04
0.13
0.21
79.17
Notes: Trade share is Malaysian export or import by industry as a percentage of Malaysian total export
to or import from China in 2010. The term n.e.s. means not elsewhere specified.
Source: World Bank, World Integrated Trade Solution (WITS)
The rest of this study is organized as follows: Section II discusses the models
and outlines the estimation methods, while Section III reports the empirical results.
Summary and conclusion will be discussed in Section IV. Data definitions and
sources are cited in the Appendix.
2. The models and method
To assess the effects of exchange rate volatility on MalaysiaChina trade flows,
we employed a similar model used by Bahmani-Oskooee and Hegerty (2009). We
636
assume that exports and imports are a function of real income, real exchange rate
as a measure of the relative price level because prices at the commodity level are
not available and bilateral exchange rate volatility. In this way, we can formulate
the long-run models for Malaysian imports of industry i and Malaysian exports of
industry i in log linear form as follows:
ln MtM = 0 + 1 ln YtM + 2 lnREXt + 3 lnVOLt + 4 DUMAC
t
+ 5 DUMGC
+ t
t
(1)
and
ln XtM = 0 + 1 ln YtC + 2 lnREXt + 3 lnVOLt
GC
+ 4 DUMAC
+ t
t + 5 DUMt
(2)
where ln MtM is the measure of Malaysian import volume for industry i and ln XtM
represents the export volume of Malaysia for industry i, ln YtM and ln YtC are
Malaysian and Chinese incomes, respectively. lnREXt is the real exchange rate
and lnVOLt is a measure of exchange rate volatility of Malaysian ringgit versus
Chinese yuan, which captures the bilateral exchange rate risk between the two
countries. The estimated coefficients 1 and 1 are expected to be positive. It
means that any increase in Chinese income will result in an increase in demand for
Malaysian exports. On the other hand, any increase in Malaysian income increases
the demand for imports from China.
The bilateral real exchange rate lnREXt is defined as yuan in terms of ringgits.
The signs of coefficients 2 and 2 depend on the import demand elasticity for
commodity i in the models. The sign is expected to be positive for 2 and negative
for 2 if Chinese and Malaysian import demands for commodity i are elastic. However, if the import demand of these two countries is inelastic, the signs for 2 and 2
are reverse. In this study, the real bilateral exchange rate (REX) is defined as (PM
NEX)/PC , where NEX is the nominal bilateral exchange rate defined as the number
of yuan per ringgit. PM and PC are Malaysian and Chinese price levels, respectively.
Both prices are measured by their countries consumer price index (CPI).
As explained earlier, the theoretical literature is not unanimous on the effect of
exchange rate volatility on trade. An increase in real ringgit/yuan volatility could
introduce uncertainty about the future prices and profits hurting trade today. On
the other hand, the same volatility could induce traders to trade more in order to
avoid loss of profit and income in the future. So, the estimates of 3 and 3 could
be positive or negative. Different measures of volatility are used in the literature to
proxy the exchange rate risk factor. The most common measure for this variable
is some measure of variance of exchange rate, for example, standard deviation of
the level or the rate of change of exchange rate, moving standard deviation, or a
GARCH model. Because of our small sample size, we follow the large number of
empirical studies like De Vita and Abbott (2004), Bahmani-Oskooee and Wang
(2007), Bahmani-Oskooee and Hegerty (2009), and Bahmani-Oskooee, Bolhasani,
637
and Hegerty (2012), which used the standard deviation of 12 monthly observations
within a specific year as the measure of the exchange rate volatility.7 Two dummy
variables, DUMAC (Asian financial crisis) and DUMGC (global financial crisis)
are added to the models to capture the effects of these two shocks on the bilateral
trade between Malaysia and China.
As mentioned earlier, equations (1) and (2) represent the long-run relationships
among the variables. To infer the short-run effects, equations (1) and (2) can be
specified in a vector errorcorrection format following Pesaran, Shin, and Smith
(2001) ARDL bounds testing approach. These equations are shown below,
ln MtM = 0 +
n1
M
1k ln Mtk
+
k=1
n4
n2
M
2k ln Ytk
+
k=0
n3
3k ln REXtk
k=0
M
M
4k ln VOLtk + 0 ln Mt1
+ 1 ln Yt1
+ 2 ln REXt1
k=0
GC
+ 3 ln VOLt1 + 4 DUMAC
+ t
t + 5 DUMt
(3)
and
ln XtM = 0 +
n1

k=1
n4
M
1k ln Mtk
+
n2

k=0
C
2k ln Ytk
+
n3
3k ln REXtk
k=0
M
C
4k ln VOLtk + 0 ln Xt1
+ 1 ln Yt1
+ 2 ln REXt1
k=0
GC
+ 3 ln VOLt1 + 4 DUMAC
t + 5 DUMt + t
(4)
These specifications provided a direct way to test cointegration among the

variables in equations (1) and (2). Lagged level variables in equations (3) and (4)
imply cointegration between variables. To justify retention of lagged level variables
in the ARDL models, Pesaran, Shin, and Smith (2001) proposed using the standard
F-test to determine joint significance of lagged level variables with new critical
values. They tabulated two sets of critical values known as lower and upper bounds.
The lower bound critical values assume that all variables are integrated of order
zero, or I(0) and upper bound critical values assume that variables are integrated
of order one, or I(1). Therefore, if the computed F- statistics is higher than the
upper-bound critical value, the null hypothesis of no cointegration is rejected.
The ARDL approach suggested by Pesaran, Shin, and Smith (2001) for cointegration analysis has a number of attractive advantages over its alternatives. The
main advantage of this approach is that it is not necessary to examine the nonstationary property of the variables in the model. This approach can also avoid
the failure of testing the hypothesis on the estimated coefficients in the long run
due to the endogeneity problems found in Engle and Granger (1987) approach.
638
An additional benefit of the bounds testing approach is that we are able to assess
the short run as well as its long-run effects of the independent variables on the
dependent variable at the same time.8
3. Empirical results
In this section, the error-correction models shown in equations (3) and (4) are
estimated using annual import and export data over the period of 19852010.
Data definition and sources of variables are provided in the Appendix. The ARDL
bounds testing approach starts with the F-test to confirm the existence of cointegration between the variables in the models. First, the number of lags for each differenced variable is determined. Following Bahmani-Oskooee and Gelan (2006),
we impose maximum of three lags on each first-differenced variable and select the
optimum lags using the Akaike Information Criterion (AIC). We then perform the
F-test at the optimum lags.
We first assess the ringgit/yuan volatility effect on bilateral trade flows between two countries using the aggregated data (see Table 2). The results from
the F-statistics indicate that both models are not cointegrated. However, an alternative approach to determine cointegration is to estimate the model with its
error-correcting term, ECMt1 . Kremers, Ericsson, and Dolado (1992) argued
that if the error-correcting coefficient is negative and significant, the variables
are cointegrated and it will adjust toward equilibrium. From this approach, only
import model is cointegrated. This shows that the exchange rate volatility has
significant short- and long-run effects on Malaysian import from China. Furthermore, exchange rate uncertainty and currency depreciation have negative effect on
Malaysian import volume in the long run. The lack of cointegration especially in
the export model is probably due to the use of aggregated data. In the next section,
we will focus on the industry-level data to shed some light on this relationship.
Turning to the import model in equation (3), we report only the 94 Malaysian
import industries that are cointegrated in Tables 3 and 4.9 As explained in the
previous section, two sets of critical values were tabulated by Pesaran, Shin, and
Smith (2001). However, these critical values are generated for sample sizes of
500 and 1000 observations. Since these exiting critical values were based on large
sample sizes, Narayan (2005) has calculated the critical values for small sample
sizes using the same methodology that was used by Pesaran, Shin, and Smith
(2001). If the computed F-statistics is higher than the upper bound of the critical
values, then the null hypothesis of no cointegration is rejected. Given the relatively
small sample size in this study, we used the critical values computed by Narayan
(2005) for the small sample size.
The results of cointegration in Table 3 show that the F-statistic is greater
than its upper bound critical value (4.15) in only 30 industries. However, with
the alternative approach suggested by Kremers, Ericsson, and Dolado (1992), the
results indicate another 64 import industries that are cointegrated, bringing the
total to 94 industries.10
Cointegration results
lnVOLt2 Constant
DUMAC DUMGC
lnYM
lnREX
0.4(4.43) 17.5(0.9) 1.29(1.62) 1.68(1.63)
0.72(1.0) 1.44(0.81)
Long-run coefficient estimates

lnVOL
0.62(1.06)
F-statistics ECMt1
0.73
0.83(1.31)
Cointegration
No
Cointegration results
Notes: Numbers in parentheses are the t-ratios. The upper bound critical value of the F-test for cointegration is 4.15 at the 10% level of significance (Narayan 2005,
p. 1988) DUMAC and DUMGC are the dummy variables for the Asian financial crisis and the global financial crisis, respectively.
Significance at 10% level, significance at 5% level, and significance at 1% level.
lnVOLt
lnVOLt1
0.77(5.8) 0.09(0.9)
Short-run coefficient estimates
Export model
lnVOLt
lnVOLt1 lnVOLt2 Constant
DUMAC DUMGC
lnYC
lnREX
lnVOL
F-statistics. ECMt1
Cointegration
1.22
0.4(3.43) Yes
0.4(2.8) 0.89(3.73) 0.32(2.93) 11.54(0.45) 0.17(0.26) 0.12(0.42) 0.6(0.6) 1.64(3.02) 4.22(3.12)
Aggregate bilateral trade flows for import and export models.
Import model
Table 2.

639
Diagnostic statistics for import models.
025. Milk and cream

034. Fish, fresh (live or dead), chilled, or frozen
037. Fish, crustaceans and mollusks, prep./pres.
042. Rice
047. Other cereal meals and flours
048. Cereal preps and preps. of flour of fruits or vegetables
056. Vegetables, roots, and tubers, prep./pres., n.e.s.
057. Fruits and nuts (not incl. oil nuts), fresh or dried
062. Sugar confectionery and other sugar preps.
081. Feedstuff for animals (not incl. unmilled cereals)
098. Edible products and preps., n.e.s.
111. Nonalcoholic beverages, n.e.s.
263. Cotton
273. Stone, sand, and gravel
278. Other crude minerals
291. Crude animal materials, n.e.s.
292. Crude vegetable materials, n.e.s.
323. Briquettes; coke and semi-coke of coal, lignite/peat
334. Petroleum products, refined
424. Other fixed vegetable oils, fluid or solid crude
511. Hydrocarbons, n.e.s., their halogens, and derivatives
513. Carboxylic acids and their anhydrides, halides, etc.
514. Nitrogen-function compounds
515. Organoinorganic and heterocyclic compounds
516. Other organic chemicals
522. Inorganic chemical elements, oxides and halogen salts
531. Synthetic organic dyestuffs, nat indigo and color lakes
533. Pigments, paints, varnishes, and related materials
551. Essential oils, perfumes, and flavor materials
554. Soap, cleansing and polishing preps.
Industry name
Table 3.
1.95
1
1.04
2.00
0.48
4.15
4.89
1.11
2.85
1.43
7.25
2.05
0.9
3.05
0.84
0.41
4.88
7.67
3.2
2.32
2.96
0.09
0.42
3.17
4.16
1.85
0.64
2.43
0.92
0.44
F-statistics
0.64(2.62)
2.03(5.93)
1.13(10.5)
0.76(3.78)
0.59(2.1)
1.59(2.97)
0.12(0.7)
0.43(2.63)
0.87(11.2)
0.67(2.83)
1.35(5.07)
0.43(1.71)
2.55(2.14)
0.54(2.72)
0.51(1.77)
0.64(3.19)
0.62(1.69)
0.36(2.35)
0.67(3.45)
0.87(3.69)
0.73(3.72)
0.36(2.11)
0.28(1.98)
0.51(2.41)
0.36(1.49)
1.46(6.18)
1.06(5.62)
0.71(3.57)
1.1(4.54)
0.36(2.65)
ECMt1
0.45
0.78
0.86
0.59
0.4
0.74
0.75
0.43
0.92
0.31
0.78
0.76
0.64
0.43
0.74
0.65
0.65
0.86
0.87
0.46
0.93
0.73
0.59
0.77
0.76
0.87
0.74
0.83
0.73
0.38
Adjusted R2
3.48
1.03
5.85
0.03
2.96
2.2
4.91
0.02
2.18
4.89
0.09
3.12
4.14
3.002
1.87
1.31
0.67
1.73
0.23
0.02
4.86
1.07
0.06
0.49
17.3
0.34
0.04
0.2
0.33
0.05
LM
3.03
6.38
0.44
0.55
0.09
14.9
0.41
2.31
11.4
10.3
1.06
3.06
1.44
5.22
6.16
1.98
0.5
0.33
3.92
1.37
2.1
0.09
0.05
0.08
6.47
12.8
5.31
5.4
0.06
0.36
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
(continued)
U
S
S
S
U
S
S
S
S
S
S
S
S
S
S
S
U
S
S
U
S
U
S
U
S
S
S
U
S
S
RESET CUSUM CUSUMQ
640
(Continued).
1.1
2.51
0.68
1.98
1.78
1.38
5.74
0.9
1.07
2.84
9.66
0.88
4.48
3.86
1.49
4.74
4.36
20.6
9.79
5.01
2.42
8.89
0.66
1.75
2.69
1.79
7.4
8.84
4.93
0.18
0.36
7.44
1.86
3.41
1.2
F-statistics
0.34(2.59)
0.31(2.2)
1.79(2.47)
0.28(3.16)
1.03(4.37)
1.09(6.87)
0.72(1.89)
0.48(3.08)
0.52(1.83)
0.37(1.8)
0.07(0.25)
0.79(5.15)
0.47(1.96)
0.5(3.85)
0.59(4.08)
0.02(0.07)
1.002(3.9)
0.36(1.69)
0.72(2.33)
0.06(0.07)
0.99(3.66)
1.67(5.12)
1.51(5.89)
1.03(4.01)
0.88(5.16)
0.8(2.99)
1.4(5.6)
1.24(2.92)
1.11(2.3)
0.43(1.89)
0.7(2.21)
0.09(0.35)
0.29(1.77)
0.23(1.97)
1.02(3.29)
ECMt1
0.49
0.9
0.75
0.79
0.87
0.74
0.7
0.5
0.47
0.88
0.85
0.93
0.81
0.89
0.72
0.58
0.91
0.78
0.53
0.63
0.39
0.71
0.82
0.84
0.77
0.78
0.93
0.91
0.65
0.82
0.25
0.94
0.74
0.61
0.67
Adjusted R2
2.29
15.4
0.06
0.01
3.71
0.01
6.73
1.98
1.53
7.06
1.82
8.63
7.6
0.69
1.38
5.39
1.65
5.77
2.63
2.34
2.21
3.41
2.74
3.71
0.21
8.86
13.4
8.13
2.58
1.19
6.85
1.05
3.01
1.97
0.41
LM
572. Explosives and pyrotechnic products

583. Polymerization and copolymerization products
584. Regenerated cellulose; cellulose nitrate, etc.
592. Starch, insulin, and wheat gluten; albuminoidal subst.
621. Materials of rubber (e.g. pastes, plates, sheets, etc.)
625. Rubber tires, tire cases, etc. for wheels
633. Cork manufactures
641. Paper and paperboard
651. Textile yarn
652. Cotton fabrics, woven
653. Fabrics, woven, of manmade fiber
654. Textile fabrics, woven, other than cotton/manmade fiber
655. Knitted or crocheted fabrics
656. Tulle, lace, embroidery, ribbons, and other small wares
657. Special textile fabrics and related products
659. Floor coverings, etc.
661. Lime, cement, and fabricated construction materials
662. Clay and refractory construction materials
664. Glass
665. Glassware
666. Pottery
671. Pig iron, spiegeleisen, sponge iron, iron, or steel
674. Universals, plates and sheets of iron or steel
678. Tubes, pipes, and fittings of iron or steel
679. Iron and steel castings, forgings and stampings; rough
682. Copper
684. Aluminum
687. Tin
691. Structures and parts of iron, steel, aluminum
693. Wire products and fencing grills
695. Tools for use in hand or in machines
696. Cutlery
697. Household equipment of base metal, n.e.s.
699. Manufactures of base metal, n.e.s.
711. Steam and other vapor-generating boilers and parts
Industry name
Table 3.
3.12
7.99
0.23
1.72
4.25
10.1
1.52
0.01
1.26
2.51
7.71
5.51
5.16
0.13
0.02
0.45
14.7
0.01
5.52
2.18
0.6
4.96
0.15
18.2
1.51
6.25
3.88
0.02
1.17
0.1
4.34
19.9
1.93
10.1
1.5
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
(continued)
S
S
U
S
S
S
S
S
U
S
S
S
S
S
U
S
S
S
U
S
S
S
S
U
S
S
U
S
S
S
S
S
S
S
S
RESET CUSUM CUSUMQ

641
(Continued).
0.42
4.76
1.78
3.38
7.07
0.81
4.19
1.58
9.14
2.87
2.89
12.7
0.57
5.69
9.44
1.65
6.74
0.42
1.5
1.27
8.92
1.16
2.35
4.17
0.78
10.6
2.87
2.41
0.61
F-statistics
0.34(2.15)
0.4(1.92)
0.62(4.73)
1.22(3.21)
0.75(1.44)
1.2(4.82)
0.57(1.62)
0.28(1.84)
2.14(5.21)
0.33(2.38)
0.68(2.71)
0.34(3.1)
0.46(2.21)
0.35(0.84)
0.86(3.03)
1.3(4.55)
0.41(3.17)
1.38(3.84)
0.32(1.94)
1.28(3.42)
0.37(2.97)
0.55(2.5)
0.66(3.43)
1.26(5.4)
0.58(2.99)
1.35(0.84)
1.36(5.77)
1.35(5.26)
0.63(2.49)
ECMt1
0.65
0.83
0.88
0.65
0.66
0.51
0.59
0.74
0.73
0.77
0.76
0.83
0.81
0.74
0.73
0.72
0.96
0.57
0.83
0.45
0.79
0.41
0.56
0.79
0.73
0.82
0.66
0.79
0.15
Adjusted R2
1.95
0.79
1.79
0.12
9.25
0.05
4.87
0.65
11.9
1.11
5.1
3.37
10.2
2.38
8.84
0.12
9.27
5.29
0.01
0.03
8.05
0.35
2.57
10.8
12.01
0.00004
7.41
1.24
0.74
LM
0.005
6.53
0.6
15.1
0.43
0.03
0.24
2.36
1.82
7.77
0.18
1.77
0.1
0.27
0.03
14.4
0.35
2.69
1.04
0.18
0.97
16.3
10.3
3.42
9
0.01
0.0002
11.9
0.1
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
U
S
S
S
S
S
S
S
S
S
U
S
S
U
S
S
S
U
S
S
S
U
U
S
S
S
RESET CUSUM CUSUMQ
Notes: The upper bound critical value of the F-test for cointegration is 4.15 at the 10% level of significance (Narayan 2005, p. 1988). The values in parentheses are
the t-ratios. LM is the Lagrange multiplier test of residual serial correlation and RESET is the Ramseys test for function form. Both are distributed as 2 (1) and its
critical values is 3.84 at 5% level of significance. S=stable and U=unstable. The term n.e.s. means not elsewhere specified.
713. Internal combustion piston engines and parts

716. Rotating electric plant and parts
721. Agricultural machinery and parts
726. Printing and bookbinding machines and parts
727. Food processing machines and parts
737. Metal working machinery and parts
744. Mechanical handling equipment and parts
749. Nonelectric parts and accessories of machines
751. Office machines
776. Thermionic, cold, and photo-cathode valves, tubes, parts
812. Sanitary, plumbing, heating, lighting fixtures
821. Furniture and parts thereof
831. Travel goods, handbags, briefcases, purses, sheaths
842. Outer garments, mens, of textile fabrics
843. Outer garments, womens, of textile fabrics
844. Under garments of textile fabrics
845. Outer garments and other art., knitted
846. Under garments, knitted or crocheted
848. Art. of apparel and clothing accessories, no textile
851. Footwear
872. Medical instruments and appliances
874. Measuring, checking, analyzing instruments
882. Photographic and cinematographic supplies
884. Optical goods, n.e.s.
885. Watches and clocks
894. Baby carriages, toys, games, and sporting goods
895. Office and stationery supplies, n.e.s.
896. Works of art, collectors pieces, and antiques
899. Other miscellaneous manufactured articles
Industry name
Table 3.
642
025
034
037
042
047
048
056
057
062
081
098
111
263
273
278
291
292
323
334
424
511
513
514
515
516
522
531

DUMGC )
lnYM
lnREX
lnVOL
(continued)
1.08(3.64) 0.6(1.92)
0.26(1.37)
102.04(3.84)
2.82(2.2)
1.23(1.25)
4.13(3.86)
0.21(0.18)
2.89(2.98)
0.4(0.99)
1.26(4.09)
0.75(3.58)
98.37(13.9) 1.44(2.67) 0.57(2.22) 4.02(14)
6.38(12.69) 1.24(4.34)
0.71(5.56)
0.41(3.75)
0.27(3.84)
60.2(14)
2.24(7.86) 0.06(0.43)
2.46(14.16) 0.73(2.47) 0.02(0.11)
0.4(0.20)
0.30(0.21)
59.93(0.95)
7.65(1.61)
1.11(0.4)
2.16(0.88)
20.87(2.47)
0.71(0.63)
0.12(0.17)
0.68(1.26)
84.19(1.47) 4.93(1.50) 0.46(0.23)
3.43(1.45)
5.09(1.21)
1.48(0.61)
4.36(3.33)
0.64(1.23)
1.48(2.77)
0.96(0.45)
0.58(0.88)
0.39(0.59)
0.58(0.94)
48.04(3.55)
0.14(2.42)
0.03(0.89)
1.62(0.05) 0.96(0.72) 0.23(0.25)
0.45(0.36)
6.6(0.67)
0.35(0.39)
0.18(1.97)
36.76(4.34) 1.14(2.41) 0.53(1.65)
1.72(5.05)
0.32(0.68)
0.7(3.13)
0.30(3.11)
0.28(2.24)
0.46(5.07)
44.85(9.52) 1.57(4.67) 0.06(0.33)
1.83(9.48)
2.44(4.93) 0.71(2.85)
1.14(2.27)
0.43(1.65)
19.92(0.81)
2.28(1.26)
1.22(1.27)
0.51(0.53)
1.27(0.6)
0.6(0.68)
2.22(15.7)
0.27(0.72)
0.96(6.83)
0.56(4.04) 0.46(2.86) 0.25(3.08) 49.87(14.6) 0.86(3.18) 0.07(0.63)
1.03(3.13)
0.21(1.20)
79.4(3.04)
1.30(0.91) 2.19(1.4)
3.37(3.07)
2.13(0.89)
2.77(2.52)
2.86(1.44)
3.24(1.35)
1.76(1.54)
88.59(5.93)
3.62(4.58)
0.37(0.93)
3.46(5.24)
1.67(1.08)
2.33(2.69)
0.5(1.59)
0.54(2.5)
14.93(0.46)
1.81(1.05)
0.55(0.56)
0.44(0.33)
5.9(2.33)
2.13(1.71)
0.14(0.91)
32.38(3.7)
0.001(0.001)
0.55(1.25)
1.58(4.85)
1.86(1.45)
0.27(1.05)
0.65(0.97)
0.93(1.38)
6.28(2.41)
2.09(3.13)
0.42(1.56)
0.33(1.57)
21.69(1.33)
.9(2.83)
0.3(3.36)
0.2(2.09) 0.09(1.58)
18.89(4.49) 0.78(2.72) 0.17(1.18)
1.00(5.72)
0.36(0.88)
0.62(3.56)
0.69(2.65) 0.2(1.48)
17.93(1.02)
5.11(3.67)
1.77(1.7)
0.89(1.26)
4.66(2.19)
1.28(1.8)
2.99(5.84) 0.93(2.43) 0.6(2.67)
99.32(3.25) 7.19(3.68) 0.58(0.7)
4.95(3.62) 17.4(2.97)
6.8(3.73)
0.55(1.09)
0.5(1.5)
0.5(2.19)
38.14(1.7)
3.97(3.38) 0.08(0.12)
1.53(1.65)
2.55(1.55)
0.21(0.23)
90.39(9.19) 5.1(6.00) 0.67(1.78) 3.79(9.68)
8.87(6.34)
0.73(1.6)
0.44(1.41)
0.4(3.08)
0.12(0.42)
0.24(2.6)
69.07(2.63) 6.55(4.63) 1.84(2.20) 3.11(2.95)
6.83(3.33)
2.90(2.63)
1.11(2.34)
0.13(0.57)
102.4(5.73) 4.33(2.76) 0.55(0.63)
4.23(6.16)
6.79(2.02)
0.49(0.71)
113.05(9.61) 0.23(0.28)
0.27(0.64)
4.48(10.93)
3.95(2.47)
0.7(1.72)
0.36(2.24)
0.8(2.16)
0.26(1)
0.33(2.45) 118.2(2.89) 9.55(1.82)
0.33(0.34)
4.82(3.15)
7.96(1.72)
2.2(2.22)
0.29(1.7)
0.3(2.26) 0.26(3.26) 78.57(27.2) 0.10(0.31)
0.22(2.33)
3.41(29.45) 0.06(0.18)
0.85(6.8)
0.46(3.95) 0.21(2.55)
87.29(20.2) 1.11(2.98) 0.10(0.61)
3.67(21.04) 1.73(2.84)
0.63(3.64)
DUMAC

lnVOLt
lnVOLt1
lnVOLt2
Industry
code
Constant
Short-run and long-run coefficient estimates of Malaysian import model.
Table 4.

643
533
551
554
572
583
584
592
621
625
633
641
651
652
653
654
655
656
657
659
661
662
664
665
666
671
674
678
679
682
684
687
691
693
695
Constant
DUMAC

DUMGC )
lnYM
lnREX
lnVOL
(continued)
1.36(5.03)
0.25(1.7)
0.5(3.02)
85.5(10.5)
3.41(5.17) 1.08(2.77)
3.73(10.95)
5.11(5.72)
1.94(4.34)
0.95(4.28) 0.92(3.9) 0.46(3.49) 61.88(6.91) 1.1(1.69)
0.13(0.51)
2.69(7.28) 0.46(0.51)
1.85(5.18)
0.51(1.79)
60.79(3.27) 5.18(3.4) 0.04(0.04)
2.66(3.69) 6.45(2.46)
1.40(2.6)
0.99(1.78)
0.54(1.87)
66.97(1.31)
4.18(1.25)
0.26(0.14)
2.56(1.27) 6.69(1.06)
0.71(0.3)
0.35(0.56)
3.62(3.9) 15.5(2.1)
0.81(0.78)
0.26(1.09)
78.56(2.94) 1.41(0.61)
0.55(3.45)
89.96(14.6) 0.47(0.72)
0.22(1.19)
3.66(16.15) 0.02(0.05)
0.08(0.4)
0.77(1.85)
0.66(0.34)
1.00(1.1)
4.67(6.04) 5.72(2.47) 0.3(0.31)
0.11(0.51)
111.7(5.7)
2.2(7.64)
2.14(3.86) 0.31(1.11)
0.16(0.83)
0.27(2.02) 0.29(2.82) 51.72(7.12) 0.84(2.15) 0.1(0.44)
93.99(13.8) 0.24(0.42)
0.39(1.31)
3.93(15.1)
0.16(0.30)
0.62(2.72)
0.68(2.94)
0.79(1.43)
0.46(1.07)
0.75(2.62)
14.96(0.32)
2.98(0.86)
4.86(1.47)
0.49(0.27)
1.45(0.51)
1.29(0.85)
74.97(3.85) 4.62(3.15) 0.18(0.22)
3.36(4.35) 5.29(2.44)
2.18(3.49)
1.05(3.16)
0.22(1.1)
18.8(1.16)
0.5(0.42)
0.5(0.88)
1.07(1.82)
1.82(0.72)
0.43(1.04)
0.65(6.73)
0.34(5.4)
24.87(0.8)
0.85(0.87)
0.72(1.33) 0.82(0.66)
1.55(1.51)
0.65(0.92)
0.27(2.88)
0.59(5.01)
0.23(3.23)
455.7(0.23)
1.73(0.2)
1.34(0.24)
18.7(0.23) 27.8(0.24)
16.05(0.24)
0.3(2.44)
0.3(1.22)
3.72(7.19)
6.98(8.10)
1.69(4.55)
0.32(1.84)
1.02(6.12) 0.72(6.34) 93.63(6.7) 1.94(1.39)
0.85(2.91) 0.04(0.17) 0.59(3.56) 43.5(2.35)
3.11(1.8)
1.09(1.49)
1.87(2.47)
0.72(0.25)
1.9(2.34)
0.46(3.58)
0.08(0.54)
0.15(1.73)
61.71(5.95) 1.64(1.46)
0.24(0.57)
2.64(5.88) 1.29(1.94) 0.27(0.59)
0.06(0.59)
0.07(1.07)
74.65(11.2) 1.68(2.83) 0.23(1.12)
3.17(11.55) 2.24(5.01) 0.47(1.31)
0.45(2.57)
655,19(0.08) 4.39(0.1)
0.59(0.03)
26.3(0.08)
16.94(0.07)
1.63(0.04)
0.23 (0.81)
0.07(0.54)
0.16(1.75)
3.83(8.37)
3.74(2.62)
1.31(2.74)
0.01(0.03)
1(3.08) 0.48(2.77) 93.75(7.83) 0.78(0.93) 0.07(0.17)
1.23(4.24) 0.67(3.16) 0.13(1.05)
216 (3.68) 10.48(2.48) 2.09(1.69)
8.71(3.71) 2.6(0.95)
5.02(2.01)
0.7(2.17)
1.07(3.13)
0.42(2.03)
44.67(1.3)
1.8(0.79)
1.12(1.03)
1.74(1.2)
2.56(0.72)
2.78(1.77)
0.86(0.99) 1.4(2.64) 0.58(1.71)
743.21(0.09)
30.27(0.07)
6.69(0.07)
27.72(.07)
25.23(0.06)
4.72(0.06)
0.68(1.8)
0.37(1.64)
10.99(0.76)
0.97(1.04)
0.20(0.41) 0.37(0.64) 1.3(1.33)
1.73(3.05)
0.66(1.78)
0.66(1.67) 0.88(1.82)
0.45(1.54)
85.16(8.17) 0.43(0.41) 0.31(0.99)
3.59(8.17) 2.44(2.16)
0.36(0.82)
129.7(12.4) 0.44(0.49) 0.25(0.63)
5.68(13.37) 1.57(1.07)
3.06(6.37)
2.22(4.44) 1.02(2.81)
0.67(2.05) 0.78(3.2) 0.39(2.42) 122.9(15.4) 2.46(4.38) 0.04(0.13)
5.14(16.22) 2.71(1.6)
1.38(3.91)
0.24(0.86)
1.43(4.97)
0.5(2.49)
73.22(6.1) 1.16(1.55)
0.3(0.72)
2.78(5.56)
1.54(2.29)
1.9(3.35)
0.45(1.3)
0.39(1.62)
0.2(1.33)
134.7(7.8)
3.99(3.89) 1.52(2.19) 5.57(8.68) 5.39(3.74) 1.4(2.59)
2.87(5.63)
0.22(0.56)
1.51(5.79) 150.4(11.6) 3.63(4.54) 0.71(1.78)
6.32(11.89) 5.35(3.97) 2.03(3.88)
1.1(1.95)
0.46(1.25)
129.9(5.62) 4.6(1.69)
2.12(2.11) 5.13(5.81)
3.39(1.7)
2.33(2.29)
1.32(1.82)
0.33(0.45)
0.61(1.17)
123.2(4.26) 1.64(0.68) 0.79(0.77)
5.45(4.93) 9.24(1.66)
2.84(2.54)
1.00(3.15) 1.13(4.49) 0.39(2.68) 171.9(2.12)
6.56(2.09) 1.81(1.17)
7.34(2.16)
8.78(1.64)
5.43(1.96)
0.2(0.99)
28.88(3.96) 1.06(2.05)
0.43(1.22)
1.37(4.78) 0.57(0.87)
0.28(1.27)

lnVOLt
lnVOLt1
lnVOLt2
Industry
code
(Continued).
Table 4.
644
0.61(3.29)
0.14(0.79)
0.01(0.09)
1.18(0.99)
0.67(2.00)
0.42(1.97)
1.32(5.2)
0.81(1.33)
0.18(0.41)
1.85(3.41)
1.23(3.34)
0.01(0.12)
0.97(2.05)
0.03(0.06)
0.17(0.66)
0.18(0.92)
0.38(1.29)
0.21(0.4)
0.1(0.24)
0.71(1.85)
0.6(2.46)
0.97(1.93)
0.06(0.33)
0.02(0.09)
0.21(1.00)
0.47(1.37)
0.43(1.14)
0.41(1.09)
0.18(1.50)
0.06(0.75)
0.59(4.27)
0.58(1.52)
0.19(0.81)
0.73(2.9)
0.44(2.53)
0.03(0.09)
0.18(1.17)
0.42(3.63)
0.86(2.35)
0.34(1.75)
0.64(2.79)
0.12(0.28)
0.26(1.08)
0.02(0.2)
0.15(2.5) 0.17(4.12)
0.09(1.49)
1.61(4.67) 0.74(3.1)
0.33(1.52)
0.64(2.67)
0.45(2.56)
1.25(2.25) 0.58(2.14)
0.47(2.63) 0.36(2.67)
0.07(0.22) 0.3(1.63)
0.95(2.21)
0.28(1.43)
0.14(1.99)
0.1(1.21)
1.23(1.48)
0.07(0.2)
0.28(4.17)
0.12(1.38)
0.07(0.52)
0.15(1.82)
1.09(1.63)
40.57(0.18)
58.17(2.56)
30.81(1.22)
172.4(3.77)
101.6(3.53)
114(6.32)
103.1(8.87)
135.6(5.94)
62.91(3.52)
111.7(10.6)
92.03(7.91)
78.18(7.32)
101.5(18.9)
62.95(0.8)
49.07(3.76)
82.71(3.67)
116.8(4.89)
67.35(0.77)
144.4(11.5)
29.38(2.74)
95.39(1.32)
155.2(14)
37.87(2.45)
49.11(7.13)
55.93(1.65)
69.36(2.49)
72.54(3.5)
141.4(11.1)
65.64(7.15)
50.19(15.9)
63.34(22.1)
108.6(8.5)
22.27(2.02)
Constant
3.49(0.27)
0.71(0.49)
0.42(0.24)
7.56(1.89)
6.74(2.57)
1.2(1.51)
6.05(5.08)
0.59(0.49)
1.48(1.20)
1.47(1.72)
0.34(0.36)
3.51(2.38)
1.43(3.88)
7.26(1.87)
1.36(1.48)
3.37(1.38)
2.71(2.62)
0.06(0.01)
1.27(0.74)
1.27(1.71)
2.24(1.39)
3.32(4.15)
0.99(0.89)
0.02(0.04)
2.25(0.85)
2.76(2.08)
0.34(0.26)
2.16(2.38)
0.76(1.17)
0.3(1.63)
0.91(4.96)
3.39(4.92)
1.1(1.42)
DUMAC
0.61(0.28)
0.43(0.11)
0.62(0.83)
2.62(2.72)
0.34(0.51)
1.48(1.49)
2.51(1.31)
6.74(3.88)
1.28(0.86)
4.26(3.74)
0.18(0.52)
4.63(6.67)
0.79(1.59)
4.06(9.24)
0.003(0.01)
5.6(5.97)
0.6(0.85)
2.63(3.45)
0.37(0.81)
4.83(11.68)
0.77(1.57)
4.03(8.93)
0.86(1.12)
3.31(7.83)
0.32(1.89) 4.11(18.89)
4.08(1.66)
3.55(1.29)
0.75(0.99)
2.00(3.58)
0.96(1.49)
3.7(4.51)
0.39(0.74)
4.83(5.05)
3.32(0.7)
2.7(0.74)
0.29(0.61)
5.98(12.25)
1.86(3.19) 1.33(3.11)
0.76(0.83) 3.37(1.21)
0.16(0.41)
6.3(14.01)
0.99(1.34)
1.75(3.16)
0.40(1.39)
2.18(8.23)
1.27(1.49)
2.37(1.75)
0.58(0.83)
2.79(2.40)
0.113(0.16) 2.77(3.23)
0.94(2.19)
5.74(10.85)
0.53(1.41)
2.73(7.38)
0.121(1.09) 2.23(17.12)
0.03(0.29)
2.69(23.31)
0.287(0.72) 4.38(8.87)
0.26(0.5)
1.09(2.52)

DUMGC )
lnYM
15.3(0.39)
2.16(1.24)
4(1.84)
3.92(1.26)
3.69(1.07)
4.42(3.38)
0.3(0.35)
0.88(0.53)
0.28(0.14)
0.71(0.62)
0.74(0.47)
6.8(1.88)
2.21(3.70)
8.9(1.06)
1.57(0.97)
4.89(2.6)
0.89(0.49)
0.88(0.23)
2.14(1.23)
2.58(2.45)
16.4(1.99)
1.03(0.57)
5.1(1.83)
1.44(2.46)
3.67(1.53)
1.48(0.94)
2.71(1.74)
4.71(3.56)
2.53(2.03)
1.31(5.22)
0.21(0.97)
4.07(3.61)
0.61(0.62)
lnREX
10.11(0.37)
0.86(0.96)
1.63(1.45)
1.59(1.04)
1.99(2.21)
0.83(1.97)
1.27(3.77)
1.15(1.36)
0.47(0.55)
2.37(4.59)
1.72(3.44)
0.05(0.13)
0.72(3.03)
1.77(0.7)
0.94(1.23)
0.96(1.13)
1.07(1.39)
1.72(0.4)
0.44(0.87)
0.11(0.25)
2.32(2.1)
1.53(2.74)
0.19(0.38)
0.02(0.09)
2.57(1.93)
1.46(1.17)
3.06(2.85)
0.7(1.22)
0.03(0.07)
0.29(2.3)
0.34(3.14)
1.22(3.00)
0.3(0.90)
lnVOL
Notes: Numbers in parentheses are the t-ratios. DUMAC and DUMGC are the dummy variables for the Asian financial crisis and the global financial crisis, respectively.
696
697
699
711
713
716
721
726
727
737
744
749
751
776
812
821
831
842
843
844
845
846
848
851
872
874
882
884
885
894
895
896
899

lnVOLt
lnVOLt1
lnVOLt2
Industry
code
(Continued).
Table 4.

645
646
Focusing on the short-run results in Table 4, among the 94 cases, 69 industries

are found to have at least one coefficient of real exchange rate volatility that is
significant at the 5% level.11 Therefore, in most industries ringgit/yuan volatility
seems to have short-run effects on Malaysian imports from China. Do these shortrun effects translate into the long-run effects? To answer this question, we also
reported the long-run coefficient estimates for the import models in Table 4. Results
show that the lnVOL is significant in 46 industries (at the 5% level). Moreover,
in 15 of these industries the coefficients are negative, implying that increasing the
ringgit/yuan volatility decreases the industry volume of import. These industries
are 025, 034, 062, 273, 323, 515, 655, 664, 666, 679, 716, 751, 845, 872, and 882.
Results also show that the lnREX is significant in 42 industries. However, the
short-run effects shift into the long run in 35 out of the 42 industries.12 These
industries are 034, 037, 042, 062, 291, 334, 511, 513 514, 515, 516, 531, 533,
554, 583, 592, 621, 641, 654, 656, 661, 679, 682, 684, 699, 716, 749, 751, 821,
848, 882, 884, 885, 894, and 896.13 Trade share of each industry reveals that only
four large industries, aluminum (1.27%), manufactures of base metal (1.47%),
rotating electric plant and parts (1.52%), and nonelectric parts and accessories
of machines (1.2%) are among the 35 industries. Thus, it appears that almost all
industries that respond to changes in the exchange rate are small and intermediate
goods industries. These 35 industries account for almost 14.47% of the Malaysian
import from China in 2010. Moreover, in 24 of these industries (034, 037, 062, 334,
511, 513, 514, 516, 531, 533, 554, 583, 592, 621, 641, 656, 682, 684, 699, 749,
821, 848, 882, and 896), the coefficients are negative, implying that an increase in
real depreciation of the Malaysian ringgit will decrease import of Malaysia from
China by these industries. From the long-run results, Malaysian economic growth
is a main determinant of Malaysian imports from China in the majority of the
industries. It carries a positive and highly significant coefficient in 70 industries.14
In addition to the F-test and ECMt1 results, Table 3 shows the results of some
major diagnostic statistics. The Lagrange multiplier (LM) test for serial correlation
and Ramseys Regression Equation Specification Error test (RESET) for functional
misspecification are also reported. Both statistics are distributed as 2 with one
degree of freedom. Given the critical value of 3.84 at the 5% level of significance
for LM and RESET test, it appears that our models pass these tests in the majority of
the cases. Following Bahmani-Oskooee and Goswami (2003), we also establish the
stability of short-run and long-run coefficient estimates by applying the cumulative
sum (CUSUM) and cumulative sum of squares (CUSUMSQ) tests for the residuals
of each optimal model. Stable coefficients are identified by S and unstable ones
by U. Clearly, almost every estimated model seems to be stable. Finally, the size
of the adjusted R2 indicates a good fit in all models.
Similar to the previous model, the export model indicates that only 16
Malaysian export industries that are cointegrated. This is shown in Table 5 by
the F-test and the negative and significant coefficient obtained from lagged errorcorrection term. Once again, Table 6 shows the result of short-run coefficient
estimates of real exchange rate volatility and the long-run coefficient estimates
Diagnostic statistics for export models.
6.16
2.27
0.84
4.5
5.72
2.5
12.79
2.96
5.7
1.24
2.59
2.34
0.83
4.35
1.24
2.7
F-statistics
0.22(1.39)
0.67(3.55)
0.51(1.97)
0.31(2.86)
0.98(10.7)
0.75(4.16)
1.37(7.27)
0.55(4.01)
1.38(5.56)
0.5(2.39)
1.68(5.78)
0.64(3.88)
0.91(5.88)
0.32(0.81)
1.36(7.28)
1.06(4.78)
ECMt1
0.45
0.94
0.54
0.98
0.97
0.63
0.93
0.61
0.92
0.47
0.79
0.88
0.91
0.91
0.8
0.79
Adjusted R2
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
S
U
S
S
U
S
S
S
S
U
S
S
S
S
S
S
S
RESET CUSUM CUSUMQ
11.1
7.87
5.53
0.23
1.76
3.003
0.001 6.05
3.63
1.13
0.04
3.81
0.04
0.003
0.02
0.07
12.1
0.01
1.14
2.27
1.15
0.23
0.99 11.58
0.16
1.73
0.05
7.23
0.61
4.23
1.27
9.55
LM
Notes: The upper bound critical value of the F-test for cointegration is 4.15 at the 10% level of significance (Narayan 2005, p. 1988). The values in parentheses are
the t-ratios. LM is the Lagrange multiplier test of residual serial correlation and RESET is the Ramseys test for function form. Both are distributed as 2 (1) and its
critical values is 3.84 at 5% level of significance. S=stable and U=unstable. The term n.e.s. means not elsewhere specified.
232. Nat. rubber latex; nat. rubber and similar nat. gums
247. Wood in rough/squared
248. Wood, simply worked, and railway sleepers of wood
266. Synthetic fibers suitable for spinning
424. Other fixed vegetable oils, fluid or solid, crude
431. Animal and vegetable oils and fats, processed and waxed
554. Soap, cleansing and polishing preps.
634. Veneers, plywood, improved or reconstituted wood
651 Textile yarn
684. Aluminum
741. Heating and cooling equipment and parts
764.Telecommunication equipment and parts
776. Thermionic, cold, and photo-cathode valves, tubes, parts
872. Medical instruments and appliances
892. Printed matter
893. Art. of materials described in division 58
Industry name
Table 5.

647
0.66(1.14)
0.45(3.94)
0.19(0.63)
0.27(1.36)
0.29(1.93)
0.55(1.58)
0.12(0.69)
0.33(0.92)
0.19(0.98)
1.56(2.98)
2.63(2.95)
1.26(2.76)
0.58(1.91)
0.51(1.07)
1.35(3.26)
0.14(0.51)
1.00(2.63)
0.14(1.73)
0.15(1.48)
0.26(2.58)
0.8(3.87)
0.58(2.46)
0.12(0.94)
0.46(2.99)
0.41(2.13)
0.24(2.11)
0.88(2.24) 0.87(2.76)
0.87(1.77)
0.17(0.67) 0.68(3.46)
0.12(0.44)
0.92(4.15)
0.92(2.43) 0.34(1.41)
1.14(4.02)
0.56(3.09)
0.39(2.24)
0.23(1.58)
0.07(0.2)
85.09(0.85)
3.91(0.51)
21.39(3.32)
0.79(1.93)
16.85(0.65)
0.65(0.51)
28.99(1.65)
1.03(0.64)
28.33(4.93) 0.79(2.62)
21.04(1.94)
0.73(0.5)
32.73(5.77) 0.07(0.27)
1.33(0.05)
2.99(1.68)
35.50(5.57) 1.47(2.29)
52.18(1.87)
5.37(1.69)
46.93(4.55) 1.54(1.55)
67.79(1.7)
3.15(2.46)
62.83(6.14) 1.03(0.94)
133.75(1.95)
4.3(0.99)
23.06(3.19) 2.00(2.94)
26.86(4.04)
0.21(0.27)
8.86(1.01)
3.77(1)
0.98(2.5)
0.5(2.3)
0.46(0.59)
0.4(0.4)
2.47(2.61)
1(1.5)
0.49(1.66)
1.38(6.97)
0.28(0.54)
1.12(2.84)
1.31(5.67)
1.41(6.75)
1.03(1.24)
0.24(0.25)
0.57(2.19)
1.41(6.74)
1.35(0.77)
1.9(1.94)
0.09(0.15)
1.55(4.08)
1.07(1.51)
1.8(1.4)
4.65(4.41) 2.55(7.49)
2.13(0.68)
4.52(2.04)
0.04(0.11)
0.9(3.47)
0.37(1.39)
1.19(5.02)

DUMGC
lnYC
6.84(0.48)
2.01(1.96)
3.39(0.96)
1.78(0.96)
0.66(0.69)
2.3(1.4)
1.71(2.95)
6.01(1.99)
0.05(0.06)
5.51(1.004)
7.6(5.21)
15.3(3.27)
9.48(4.31)
5.49(0.71)
0.9(1.13)
3.26(3.7)
lnREX
lnVOL
2.67(0.61)
0.67(3.43)
0.19(0.32)
0.5(0.74)
0.58(2.49)
0.31(0.47)
0.29(1.43)
0.86(1.28)
0.09(0.44)
1.88(1.11)
1.26(1.71)
1.13(1.58)
1.35(2.24)
3.39(1.46)
2.01(5.99)
0.51(1.55)
Notes: Numbers in parentheses are the t-ratios. DUMAC and DUMGC are the dummy variables for the Asian crisis and the global crisis, respectively.
232
247
248
266
424
431
554
634
651
684
741
764
776
872
892
893
DUMAC

lnVOLt
lnVOLt1
lnVOLt2
Industry
code
Constant
Short-run and long-run coefficient estimates of Malaysian export models.
Table 6.
648
649
for the export models. In the short-run, there are 15 industries with at least one
coefficient that is significant at the 5% level. Looking at the long-run results, it
reveals that ringgit/yuan volatility is significant only in five of the industries (247,
424, 741, 776, and 892). The estimated coefficient is positive in only one of the
industry, 424. Furthermore, Chinese income carries a positive and highly significant coefficient in 10 industries and also real exchange rate has significant effect
on Malaysian export volume in seven industries. As shown in Table 5, majority of
the models passed all the diagnostic tests.
Table 7 highlights the effects of real exchange rate volatility on Malaysian
trade with China for 46 import industries and 5 export industries. More accurately,
the exchange rate volatility has positive influence on 31 import industries and 1
export industry. However, it has negative influence on 15 import industries and
4 export industries. Most of these industries are small. However, there are three
large import industries: universals, plates, and sheets of iron or steel (1.5%),
aluminum (1.27%), and rotating electric plant and parts (1.52%); and two large
export industries: thermionic, cold, and photo-cathode valves, tubes, parts (26.3%),
and other fixed vegetable oils, fluid, or solid crude (9.9%) in both models. It is
apparent that to respond to the exchange rate volatility, importers increased volume
of their trade as they are willing to take advantage of fluctuations for potential
gain, while exporters are risk-averse, reducing their economic activity in the face
of uncertainty. From Table 7, it appears that exchange rate volatility has significant
effects on durable as well as nondurable goods industries.
4. Summary and conclusion
Exchange rate volatility can have a profound effect on the trade volume. This
issue is relatively more important for emerging economies like Malaysia, because
of its dependence on international trade to achieve its economic development
goals and the lack of the forward exchange market to eliminate the transaction
risk. Even though there were studies on the impact of exchange rate volatility
on Malaysian trade, most of these suffered from aggregation bias due to the use
of aggregated data. To account for this deficiency, we use industry-level data to
investigate this effect between Malaysia and her largest trading partner, China. We
estimate the short- and long-run effects of exchange rate volatility by using bounds
testing approach to cointegration analysis and disaggregated industrial level data
between the two countries. Specifically, we considered a total of 151 importing
and 24 exporting industries in MalaysiaChina trade. First, our findings indicate
that 94 Malaysian import industries and 16 Malaysian export industries models are
cointegrated. Second, among these cases, exchange rate volatility has short-run
effects on majority of both the models. However, the short-run effects shift into
the long run in 46 out of 69 industries in import models and 5 out of 10 industries
in export models. Third, while in import models most of the effects of exchange
rate volatility on trade volume are positive rather than negative, in export models
the negative effect of the volatility is greater than positive. Fourth, exchange rate
volatility has significant effects on durable as well as nondurable goods industries.
Industries affected by exchange rate volatility.
Industry name
Fruit and nuts (not incl. oil nuts), fresh or dried

Edible products and preps., n.e.s.
Nonalcoholic beverages, n.e.s.
Crude vegetable materials, n.e.s.
Petroleum products, refined
Carboxylic acids and their anhydrides, halides, etc.
Other organic chemicals
Inorganic chemical elements, oxides, and halogen salts
Synthetic org.dye stuffs, etc. nat. indigo and color lakes
Pigments, paints, varnishes, and related materials
Essential oils, perfume and flavor materials
Soap, cleansing and polishing preps.
Rubber tires, tire cases, etc. for wheels
Paper and paperboard
Textile fabrics, woven, other than cotton/manmade fiber
Lime, cement, and fabricated construction materials
Clay and refractory construction materials
Universals, plates and sheets of iron or steel
Tubes, pipes, and fittings of iron or steel
Aluminum
Code
57
98
111
292
334
513
516
522
531
533
551
554
625
641
654
661
662
674
678
684
Positive effect
Panel A: Malaysian importing industries
Table 7.
0.5
0.22
0.002
0.29
0.58
0.34
0.15
0.54
0.16
0.27
0.02
0.13
0.18
0.71
0.08
0.15
0.26
1.5
0.75
1.27
25
34
62
273
323
515
655
664
666
679
716
751
845
872
882
Trade
share Code
Industry name
0.0004
0.3
0.04
0.02
0.05
0.58
0.21
0.26
0.07
0.18
1.52
0.57
0.13
0.27
0.14
Trade
share
(continued)
Milk and cream

Fish, fresh (live or dead), chilled or frozen
Sugar confectionery and other sugar preps.
Stone, sand, and gravel
Briquettes; coke and semi-coke of coal, lignite/peat
Organoinorganic and heterocyclic compounds
Knitted or crocheted fabrics
Glass
Pottery
Iron and steel castings, forgings and stampings; rough
Rotating electric plant and parts
Office machines
Outer garments and other art., knitted
Medical instruments and appliances
Photographic & cinematographic supplies
Negative effect
650
(Continued).
Tin
Structures and parts of iron, steel, aluminum
Wire products and fencing grills
Internal combustion piston engines and parts
Agricultural machinery and parts
Metal working machinery and parts
Mechanical handling equipment and parts
Under garments, knitted or crocheted
Baby carriages, toys, games, and sporting goods
Office and stationery supplies, n.e.s.
Works of art collectors pieces and antiques
687
691
693
713
721
737
744
846
894
895
896
Industry name
Other fixed vegetable oils, fluid or solid, crude
share
9.9
Trade
0.04
0.25
0.12
0.28
0.1
0.33
0.69
0.22
0.72
0.18
0.02
Trade
share
Code
247
741
776
892
Industry name
Industry name
Wood in rough/squared
Heating and cooling equipments and parts
Thermionic, cold, and photo-cathode valves, tubes, parts
Printed matter
Negative effect
Code
Negative effect
share
0.41
0.04
26.29
0.03
Trade
Trade
share
Notes: Trade share is Malaysian export or import by that industry as a percentage of Malaysian export to or import from China in 2010. The term n.e.s. means not
elsewhere specified.
Code
424
Positive effect
Panel B: Malaysian exporting industries
Industry name
Code
Positive effect
Panel A: Malaysian importing industries
Table 7.

651
652
According to the findings presented, policy-makers should consider ways to

maintain a more stable bilateral exchange rate between the two countries. However,
since MalaysiaChina trade is a part of the East Asian intra-regional trade, it is
strongly influenced by other countries in the region. We also need to take into
consideration the volatility effects between ringgit and other Malaysian trading
partners currencies in the region when interpreting the results. Future research
should also consider the third-country influence when investigating the exchange
rate volatility effect on Malaysian trade.
Notes
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
These countries are China, Indonesia, Malaysia, the Philippines, and Thailand.
Bank Negara Malaysia, Monthly Statistical Bulletin, 2011, various issues.
Department of Statistics Malaysia, External Trade Statistics System. Electrical and
electronics goods corresponding to the SITC, Rev.4 classification numbers 75, 76, 77,
and 813.
Cote (1994) and McKenzie (1999) summarized the earlier studies, and in a recent
survey, Bahmani-Oskooee and Hegerty (2007) reviewed the literature on this subject
from 1999 to 2005.
Others studies that investigated the effect of exchange rate volatility from China
perspective are Chou (2000); Peridy (2003); Bahmani-Oskooee and Wang (2007),
and Bahmani-Oskooee and Xu (2012).
Sauer and Bohara (2001) tested three measures of volatility. The first is a first-order
ARCH-based model of the real effective exchange rate (RER). The second is the
moving standard errors from an AR(1) process of the RER while the third is the
moving standard error of a trend model of the RER.
For more details, see McClain, Humphreys, and Boscan (1996) and Wong, Ho, and
Dollery (2012).
For more details about the advantages of ARDL bounds testing approach, see
Halicioglu (2007), Tang (2007), and Cak and Cak (2008).
The results for industries where the variables are not cointegrated are not reported in
Tables 3 and 4 but are available from the author upon request.
Pesaran, Shin, and Smith (2001) argue that the critical values for the bounds test should
be modified if the fraction of periods in which the dummy variables are non-zero does
not tend to zero with the sample size T (see Pesaran, Shin, and Smith [2001], p. 307).
However, the dummy variables included in the model are one only in 1997 for DUMAC
and in 2008 for DUMGC . The fractions of observations where dummy variables are
non-zero are only 3.8%. Thus, we are confident that our inference is still valid.
Industries 554, 572, 659, 666, 671, 687, 691, 699, 713, and 844 are significant at the
10% level.
The results of short-run coefficient of lnREX are available upon request.
All industries are significant at the 5% level, except industries 514, 516, 656, 699,749,
848. 882, and 885, which are significant at the 10% level.
The dummy variables carry a significant coefficient in some cases. While 43 cases
are affected by the Asian financial crisis in 1997, only 11 Malaysian import industries
are affected by the global financial crisis in 2008.
References
Arize, A.C., T. Osang, and D.J. Slottje. 2000. Exchange-Rate Volatility and Foreign Trade:
Evidence from Thirteen LDCs. Journal of Business & Economic Statistics 18 (1):
1017.
653
Bahmani-Oskooee, M., M. Bolhasani, and S.W. Hegerty. 2012. Exchange-Rate Volatility

and Industry Trade Between Canada and Mexico. Journal of International Trade &
Economic Development 21 (3): 389408.
Bahmani-Oskooee, M., and A. Gelan. 2006. Black Market Exchange Rate and Productivity
Bias Hypothesis. Economics Letters 91 (2): 243249.
Bahmani-Oskooee, M., and G.G. Goswami. 2003. A Disaggregated Approach to Test the
J-curve Phenomenon: Japan Versus her Major Trading Partners. Journal of Economics
and Finance 27 (1): 102113.
Bahmani-Oskooee, M., and S.W. Hegerty. 2007. Exchange Rate Volatility and Trade
Flows: A Review Article. Journal of Economic Studies 34 (3): 211255.
Bahmani-Oskooee, M., and S.W. Hegerty. 2009. The Effects of Exchange-Rate Volatility
on Commodity Trade Between the United States and Mexico. Southern Economic
Journal 75 (4): 10191044
Bahmani-Oskooee, M., and J. Xu. 2012. Impact of Exchange Rate Volatility on Commodity
Trade Between U.S. and China: Is There a Third Country Effect. Journal of Economics
and Finance 36 (3): 555586.
Bahmani-Oskooee, M., and Y. Wang. 2007. United StatesChina Trade at the Commodity
Level and the Yuan-Dollar Exchange Rate. Contemporary Economic Policy 25 (3):
341361.
Baron, D.P. 1976. Fluctuating Exchange Rates and the Pricing of Exports. Economic
Inquiry, 14 (3): 425438.
Bredin, D., F. Stilianos, and E. Murphy. 2003. An Empirical Analysis of Short-Run and
Long-Run Irish Export Functions: Does Exchange-Rate Volatility Matter. International Review of Applied Economics 17 (2): 193208
Broll, U., and B. Eckwert. 1999. Exchange Rate Volatility and International Trade. Southern Economic Journal 66 (1): 178185.
Caglayan, M., and D. Jing. 2010. Does Real Exchange Rate Volatility Affect Sectoral
Trade Flows? Southern Economic Journal 77 (2): 313335
Chit, M.M., and A. Judge. 2011. Non-Linear Effect of Exchange Rate Volatility on Exports: The Role of Financial Sector Development in Emerging East Asian Economies.
International Review of Applied Economics 25 (1): 107119.
Chit, M.M., M. Rizov, and D. Willenbockel. 2010. Exchange Rate Volatility and Exports:
New Empirical Evidence from the Emerging East Asian Economies. World Economy
33 (2): 239263.
Chou, W.L. 2000. Exchange Rate Variability and Chinas Exports. Journal of Comparative
Economics 28 (1): 6179.
Clark, P.B. 1973. Uncertainty, Exchange Risk, and the Level of International Trade.
Western Economic Journal 11 (3): 302313.
Cote, A. 1994. Exchange Rate Volatility and Trade: A Survey. Working Paper 945. International Department, Bank of Canada.
De Grauwe, P. 1987. International Trade and Economic Growth in the European Monetary
System. European Economic Review 31: 389398.
De Vita, G., and A. Abbott. 2004. Real Exchange Rate Volatility and US Exports: An
ARDL Bounds Testing Approach. Economic Issues 9, 6978.
Doganlar, M. 2002. Estimating the Impact of Exchange Rate Volatility on Exports: Evidence from Asian Countries. Applied Economics Letters 9 (13): 859863.
Doroodian, K. 1999. Does Exchange Rate Volatility Deter International Trade in Developing Countries? Journal of Asian Economics 10 (3): 465474.
Engle, R.F., and C.W.J. Granger. 1987. Co-Integration and Error Correction: Representation, Estimation and Testing. Econometrica, 55: 251276.
Franke, G. 1991. Exchange Rate Volatility and International Trading Strategy. Journal
of International Money and Finance 10: 292307.
654
Haile, M.G., and G.T. Pugh. 2013. Does Exchange Rate Volatility Discourage International
Trade? A Meta-Regression Analysis. Journal of International Trade & Economic
Development 22 (3): 321350.
Halicioglu, F. 2007. The J-Curve Dynamics of Turkish Bilateral Trade: A Cointegration
Approach. Journal of Economic Studies 34 (2): 103119.
Hayakawa, K., and F. Kimura. 2009. The Effect of Exchange Rate Volatility on International Trade in East Asia. Journal of the Japanese and International Economics 23:
39653406.
Hooper, P., and S.W. Kohlhagen. 1978. The Effect of Exchange Rate Uncertainty on the
Prices and Volume of International Trade. Journal of International Economics 8 (4):
483511.
Hsu, K.C., and H.C. Chiang. 2011. The Threshold Effects of Exchange Rate Volatility
on Exports: Evidence from US Bilateral Exports. Journal of International Trade &
Economic Development 20 (1): 113128.
Kremers, J.J.M., N.R. Ericsson, and J.J. Dolado. 1992. The Power of Cointegration Tests.
Oxford Bulletin of Economics and Statistics 54 (3): 325348.
McClain, K.T., H.B. Humphreys, and A. Boscan. 1996. Measuring Risk in the Mining
Sector with ARCH Models with Important Observations on Sample Size. Journal of
Empirical Finance 3(4): 369391.
McKenzie, M.D. 1999. The Impact of Exchange Rate Volatility on International Trade
Flows. Journal of Economic Surveys 13 (1): 71106.
Mohammadi, H., M. Cak, and D. Cak. 2008. Wagners Hypothesis: New Evidence from
Turkey Using the Bounds Testing Approach. Journal of Economic Studies 35 (1):
94106.
Mukherjee, D., and S. Pozo. 2011. Exchange-Rate Volatility and Trade: A Semiparametric
Approach. Applied Economics 43 (13): 16171627.
Narayan, P.K. 2005. The Saving and Investment Nexus for China: Evidence from Cointegration Tests. Applied Economics 37 (17): 19791990.
Ohr, R. 1991. Exchange-rate Strategies in Developing Countries. Intereconomics: Review
of European Economic Policy 26 (3): 115121
Peridy, N. 2003. Exchange Rate Volatility, Sectoral Trade, and the Aggregation Bias.
Review of World Economics 139 (3): 389418.
Pesaran, M.H., Y. Shin, and R.J. Smith. 2001. Bounds Testing Approaches to the Analysis
of Level Relationships. Journal of Applied Econometric, 16 (3): 289326.
Poon, W.C., C.K. Choong, and M.S. Habibullah. 2005. Exchange Rate Volatility and
Exports for Selected East Asian Countries: Evidence from Error Correction Model.
ASEAN Economic Bulletin 22 (2): 144159.
Sauer, C. and A.K. Bohara. 2001. Exchange Rate Volatility and Exports: Regional Differences Between Developing and Industrialized Countries. Review of International
Economics 9 (1): 133152.
Tang, T.C. 2007. Money Demand Function for Southeast Asian Countries: An Empirical
View from Expenditure Components. Journal of Economic Studies 34 (6): 476496.
Thorbecke, W. 2008. The Effect of Exchange Rate Volatility on Fragmentation in East Asia:
Evidence from the Electronics Industry. Journal of the Japanese and International
Economies 22 (4): 535544.
Viaene, J.M., and C.G. De Vries. 1992. International Trade and Exchange Rate Volatility.
European Economic Review 36: 13111321.
Willett, T.D. 1986. Exchange-Rate Variability, International Trade and Resource Allocation: A Perspective on Recent Research. Journal of International Money and Finance
5: 101112.
Wong, K.N., and T.C. Tang. 2008. The Effects of Exchange Rate Variability on Malaysias
Disaggregated Electrical Exports. Journal of Economic Studies 35 (2): 154169.
655
Wong, Y.S, C.M. Ho, and B.E. Dollery. 2012. Impact of Exchange Rate Volatility on Import
Flows: The Case of Malaysia and the United States. Applied Financial Economics, 22
(24): 20272034.
Appendix 1. Data and Sources
Annual data over the period 19852010 were used in the analysis. The data were obtained
from the following sources:
(a) World Bank, World Development Indicators (WDI).
(b) International Monetary Fund (IMF), International Financial Statistics.
(c) World Bank, World Integrated Trade Solution (WITS).
Appendix 2. Variables
XiM Real value of Malaysian exports in industry i to China (in US dollar), from source
(c). Aggregate consumer price index for Malaysia is used to deflate the nominal
exports.
MiM = Real value of Malaysian imports in industry i from China (in US dollar), from
source (c). Aggregate consumer price index for Malaysia is used to deflate the
nominal imports.
YM = The real GDP of Malaysia, from source (a).
YC = The real GDP of China, from source (a).
REX=Real bilateral exchange rate defined as (PM NEX)/PC , where NEX is the
nominal bilateral exchange rate (end of period) defined as number of Chinese yuan
per Malaysian ringgit, from source (b). PC is Chinese price level measured by CPI
from source (b), and PM is the Malaysian price level, also measured by CPI, from
source (b).
VOL=Volatility of real bilateral ringgit/yuan rate. The volatility is derived from the
standard deviation of 12 monthly real bilateral ringgit/yuan rate for each year.
Monthly CPI data and nominal exchange rate data are from source (b).

2014 Effect of Exchange Rate Volatility On Industry Trade Flows Between Malaysia and China

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

2014 Effect of Exchange Rate Volatility On Industry Trade Flows Between Malaysia and China

Caricato da

Copyright:

Formati disponibili

This article was downloaded by: [Universiti Sains Malaysia]

On: 15 November 2014, At: 23:34

The Journal of International

Effect of exchange rate volatility

Abdorreza Soleymani & Soo Y. Chua

Economics Programme, School of Social Sciences,

PLEASE SCROLL DOWN FOR ARTICLE

Downloaded by [Universiti Sains Malaysia] at 23:34 15 November 2014

The Journal of International Trade & Economic Development, 2014

Effect of exchange rate volatility on industry trade flows

Downloaded by [Universiti Sains Malaysia] at 23:34 15 November 2014

Abdorreza Soleymani and Soo Y. Chua

Corresponding author. Email: abdorrezasoleymani@yahoo.com

Downloaded by [Universiti Sains Malaysia] at 23:34 15 November 2014

The Journal of International Trade & Economic Development

Downloaded by [Universiti Sains Malaysia] at 23:34 15 November 2014

A. Soleymani and S.Y. Chua

Figure 1. Real ringgit/yuan volatility.

in 2010.3 As a result of this, intra-industry trade contributed to a relatively large

Downloaded by [Universiti Sains Malaysia] at 23:34 15 November 2014

The Journal of International Trade & Economic Development

A. Soleymani and S.Y. Chua

Meat and edible offals, prep./pres.,

Downloaded by [Universiti Sains Malaysia] at 23:34 15 November 2014

The Journal of International Trade & Economic Development

Crude animal materials, n.e.s.

Downloaded by [Universiti Sains Malaysia] at 23:34 15 November 2014

A. Soleymani and S.Y. Chua

Regenerated cellulose; cellulose

Downloaded by [Universiti Sains Malaysia] at 23:34 15 November 2014

The Journal of International Trade & Economic Development

Universals, plates and sheets of iron

Downloaded by [Universiti Sains Malaysia] at 23:34 15 November 2014

A. Soleymani and S.Y. Chua

Pumps for liquids, liquids elevators,

Downloaded by [Universiti Sains Malaysia] at 23:34 15 November 2014

The Journal of International Trade & Economic Development

Under garments, knitted or

Downloaded by [Universiti Sains Malaysia] at 23:34 15 November 2014

A. Soleymani and S.Y. Chua

Downloaded by [Universiti Sains Malaysia] at 23:34 15 November 2014

The Journal of International Trade & Economic Development

Downloaded by [Universiti Sains Malaysia] at 23:34 15 November 2014

These specifications provided a direct way to test cointegration among the

A. Soleymani and S.Y. Chua

Downloaded by [Universiti Sains Malaysia] at 23:34 15 November 2014

Long-run coefficient estimates

Short-run coefficient estimates

Short-run coefficient estimates

Long-run coefficient estimates

Aggregate bilateral trade flows for import and export models.

Downloaded by [Universiti Sains Malaysia] at 23:34 15 November 2014

The Journal of International Trade & Economic Development

Diagnostic statistics for import models.

025. Milk and cream

Downloaded by [Universiti Sains Malaysia] at 23:34 15 November 2014

RESET CUSUM CUSUMQ

Downloaded by [Universiti Sains Malaysia] at 23:34 15 November 2014

572. Explosives and pyrotechnic products

RESET CUSUM CUSUMQ

The Journal of International Trade & Economic Development

RESET CUSUM CUSUMQ

713. Internal combustion piston engines and parts