Recursive Cointegration of Energy and Stock Prices in Indonesia

Abstract

The purpose of this study is to investigate the time varying behavior and the dynamic linkages of Indonesian exchange rate, and stock, oil, and natural gas prices over the period from 2005 to 2015. To capture the dynamics of long run relationships, we use the Gregory and Hansen (1996) cointegration test with a structural break and a recursive cointegration test to examine the time-varying nature of convergence in this paper. The main findings are as follows. First, the result of the Gregory and Hansen (1996) test shows that the main structural break occured in the long-run cointegrating around 2008 and 2009 and was caused by 2008-2009 global financial crisis. Second, the results of recursive cointegration present cointegration among the variables after 2009. Finally, the results of recursive cointegration’s coefficients display that increasing oil price produce a drop in Indonesian stock prices, while rising gas prices and currency depreciation bring about higher Indonesian stock price. Natural gasplays an important role in affecting Indonesian stock prices and stabilizing the relationship among four markets.