Multicollinearity and outliers are often leads to inconsistent and unreliable parameter estimates in regression analysis. The well-known procedure that is robust to multicollinearity problem is the ridge regression method. This method however is believed are affected by the presence of outlier. The combination of GM-estimation and ridge parameter that is robust towards both problems is on interest in this study. As such, both techniques are employed to investigate the relationship between stock market price and macroeconomic variables in Malaysia due to curiosity of involving the multicollinearity and outlier problem in the data set. There are four macroeconomic factors selected for this study which are Consumer Price Index (CPI), Gross Domestic Product (GDP), Base Lending Rate (BLR) and Money Supply (M1). The results demonstrate that the proposed procedure is able to produce reliable results towards the presence of multicollinearity and outliers in the real data.

This study applies a second-generation panel unit-root tests to determine the stochastic properties of real exchange rates for 14 Asian countries. Based on three popular alternative definitions of a currency crisis, we identify the several important currency crisis episodes in the region. The purchasing power parity (PPP) hypothesis was overwhelmingly supported after accommodating these heterogeneous noisy and unstable observations. Our panel unit-root test that controls for cross-sectional dependence and is robust to structural breaks confirms that the crisis in all the countries fits well with the second-generation models of currency crisis, that is, the root cause of the currency crises may not lie in economic fundamentals. PPP relation emerges when breaks and cross country dependency has been taken into account for these 14 countries.