Multifactor on macroeconomic fundamentals to explain the behavior of sectoral indices in the Indonesian stock exchange

Abstract

The purpose of this study is to investigate the impact of macro-fundamentals using factor approach on sectoral indices in the Indonesian Stock Exchange. This study uses monthly data on the returns of sectoral indices and uses Seemingly Unrelated Regression (SUR) analysis with a multifactor model. The results show that macro-economic variables can be classified into 2 common factors; Monetary Macro Factor (MMF) and Real Macro Factor (RMF). These factors have varying effects on different sectoral indices. Due to differences in the characteristics embodied in each sector, sectors then respond differently towards the change in macroeconomic conditions in Indonesia. The MMF is dominated by variables such as BI Rate, inflation, and exchange rates, while the MRF is influenced by other variables such as foreign exchange reserves, exports, and Indonesian crude oil prices. The MMF negatively affects indexes such as basic industry and chemical, consumer goods, infrastructure, manufacturing, mining, miscellaneous industries and property and trade, while the RMF has negative effect on the mining sector. By applying regression and Principal Components approaches, the model provides higher predictive power for the price behavior in each sector. This study found that the real sector is as important as the financial sector in influencing the capital market. This demonstrates a strong connection between the real and the financial. It also shows that the Indonesian capital market is dominantly controlled by investors rather than speculators. This is of particular importance for researchers who may be considering conducting a comparison of multifactor models and other methods such as CAPM and the Five Factor Model of Fama and French.