DOMESTIC AND FOREIGN SHOCKS AND THE INDONESIAN STOCK MARKET: TIME SERIES EVIDENCE
PURNOMO, BHAYU (Adv.: Mark W Rider), Mark W Rider
The economy of Indonesia was particularly hard hit by the financial crisis of 1998. Policymakers believe that IndonesiaÂ’s economy is vulnerable to capital flight in response to foreign source shocks. Understanding the impact of domestic and foreign source shocks on the Indonesian stock market is important for prudent management of the IndonesiaÂ’s macroeconomy. This paper examines both short- and long-run relationships between domestic and foreign source shocks to the Jakarta Composite Stock Market Index (JCI). We find evidence that the JCI is cointegrated with several domestic macroeconomic variables. Further, we estimate an error correction model to identify the long-run equilibrium relationship between the JCI and domestic and foreign source macroeconomic shocks. We find that the Indonesian-dollar exchange rate has bidirectional influences on the JCI. In addition to domestic macroeconomic variables, we report evidence that the JCI is cointegrated with the stock market indexes of several Southeast Asian stock markets. We find no evidence, however, of cointegration among the JCI and the U.S. and Japanese stock markets, suggesting that the JCI is influenced by regional stock markets. We also estimate an impulse response function to simulate the effect of domestic and foreign source shocks on the JCI.
Kata Kunci : Cointegration, Granger Causality, Southeast Asian Stock Markets.
