The Indonesia stock exchange and its dynamics: An analysis of the effect of macroeconomic variables

Abstract

The relationship among some macroeconomic variables such as the exchange rate, world oil prices, and international capital market index with the Indonesian stock market (Indonesia Stock Ex-change/IDX)’s dynamics still interesting to study. Some studies still found inconsistent results, and its dependence on the dynamics of the international capital market and financial market, especially when there was turmoil in the international stock markets, such as the economic crisis in America. Those conditions made it interesting to examine whether there are influences from the Dow Jones index, the Rupiah exchange rate toward the US Dollar, and world oil prices toward the JCI. Therefore, this study uses a period of data that includes the period of data used by several previous studies that examined the JCI as the object, namely data for the period of 2005-2016. This research aims to study the effect of macroeconomic variables: Dow Jones Industrial Average, USD/IDR, and World Crude Oil Price towards the Jakarta Composite Index (JCI) during the period of 2005-2016. Using the daily closing prices of Dow Jones Industrial Average (JCI), USD/IDR, World Crude Oil Price, and Jakarta Composite Index, the GARCH (1,1) analysis showed that Dow Jones Industrial Average and World crude oil price had a positive significant effect on the JCI while USD/IDR had a negative significant effect on JCI. The findings implied the importance to consider macroeconomic variables when investing in the Indonesia Stock Exchange.