Macroeconomic Variables and Stock Indices (Islamic and
Conventional): Evidence from Indonesia
Raditya Sukmana
Islamic Economic Department, Faculty of Economic and Business, Universitas Airlangga, Indonesia
Keywords: Jakarta Composite Index (JKSE), Jakarta Islamic Index (JII), IPI, CPI, Exchange Rate, Money Supply.
Abstract: The aims of this study is to comprehensively investigate the influence of macroeconomic indicators to equity
markets (both Islamic and conventional Indices) in Indonesia as an emerging market. It relies on the unit root
and co-integration test, focusing on the period from 2003:1 to 2016:12. Two indices of Jakarta Composite
Index (JKSE) and Jakarta Islamic Index (JII) are adopted and Industrial Production Index (IPI), Consumer
Price Index (CPI), Money Supply (M2) and Currency Exchange (EXC) are also utilized as the determinants.
The result suggests that both indices share their long run movement among the variables. IPI, and CPI seem
to be following the theory by indicating positive effects on JKSE and JII.
1 INTRODUCTION
Studies on the factors affecting stock price remain a
popular area of financial research. Over the past few
decades, the interaction of stock price and the
macroeconomic variables has been a subject of
interest among academics and practitioners. Previous
studies have documented significant relationship
between stock price with selected macroeconomic
variables such as industrial production index (IPI),
exchange rate, money supply, and consumer price
index (CPI). Theoretically, the influence of
macroeconomic variables such as IPI, exchange rate,
CPI or money supply can be explained by the stock
valuation model .It argues that macroeconomic forces
may have systematic influences on stock prices via
their influences on expected discounted future cash
flows. This means that any change in the economic
variables that have an impact on the future cash flows
or the discount factors will affect the stock prices. In
addition, the concept of demand and aggregate supply
also plays a role in determining the stock market, not
only through the transmission mechanism of
monetary policy through interest rates but also
through other channels such as asset price channel.
For the last few years, we have seen the studies
conducted in developing countries such as Mohd
Hussin at al. (2012), Hosseini, S. M and Ahmad,
Zamri (2011), Abbas (2011), Hussainey K. And Ngoc
Khan (2009), Asmy at al. (2009), Ibrahim And Yusoff
(2001), Maysami and Koh (2000), Kwon et al.
(1999), Mookerjee and Yu (1997), Habibullah and
Baharumshah (1996).These studies identify such
factors as industrial production index, money supply,
consumer price index, interest rate, exchange rate,
international stock price and so forth being the
important factors in explaining stock returns.
Using vector auto regression, Abbas (2011) notes
significant interactions between consumer price
index, money supply, foreign exchange rate and stock
prices for the case of Iran. Meanwhile, Maysami and
Koh (2000) mentions that there exist a significant
contribution of interest rate and exchange rate in the
long-run relationship between Singapore’s stock
prices and various macroeconomic variables.
Hussin at al. (2012) employ vector auto regression
(VAR) analyses to investigate relationship between
Islamic stock market and macroeconomic variables
covers from April 1999 to October 2007. The findings
shows that Islamic stock prices are co-integrated with
the selected macroeconomic variables. Particularly
the stock price is positive and significant to IPI and
CPI variables but negative and significant M3 and
exchange rate variables. Meanwhile, its relation with
Islamic interest rate variables is found negative but
insignificant.
This study examines the relationship between
selected macroeconomic variables and stock indices
(Jakarta Composite Index and Jakarta Islamic Index)
in Indonesia. Specifically, this paper investigates
whether there exist evidence of long run relationship
Sukmana, R.
Macroeconomic Variables and Stock Indices (Islamic and Conventional): Evidence from Indonesia.
In Proceedings of the 1st International Conference on Islamic Economics, Business, and Philanthropy (ICIEBP 2017) - Transforming Islamic Economy and Societies, pages 83-86
ISBN: 978-989-758-315-5
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
83

between each indices of Jakarta Composite Index
(JKSE) and Jakarta Islamic Index (JII) and a set of
selected macroeconomic variables namely industrial
production index, money supply, consumer price
index, and exchange rate.
The remaining of the paper is organized as
follows: After the introduction, it describes the data
and methodology. Then, in the next two sections,
estimation results are presented on the interactions
among the variables. Finally, it ends with concluding
remarks and some discussion on the findings.
2 DATA AND METHODS
This study basically examines both long term
relationships dynamics between Indonesian equity
indices (JKSE and JII) and four macroeconomic
variables including Industrial Production Index (IPI),
Consumer Price Index (CPI), Money Supply (M2),
and Exchange Rate (EXC). The monthly data are
from the period of January 2003 to
December2016.The data on macroeconomic
variables are obtained from the central beareu of
statistics (BPS) official website while the stock price
data are from yahoofinance.
To measure stock indices, we use end-of-the-
month values of both the Jakarta Composite Index
(JKSE) and Jakarta Islamic Index (JII). The index,
which is normally used to reflect the Indonesian
equity market performance, is based on a sample of
100 component stocks for Jakarta Composite Index
(JKSE) and 30 component stocks for Jakarta Islamic
Index (JII) which are value-weighted. We employ the
consumer price index (CPI), an index that is often
cited to represent price or inflation.Real output is
measured by real industrial production index
(IPI).Meanwhile, the money supply is represented by
monetary aggregate (M2).Finally, we use the bilateral
Rupiah exchange rate vis-a` -vis the US dollar as a
measure of the exchange rates(EXC). We choose a
variable exchange rate because these variables proved
have an effect on stock prices in some countries.
This study starts with identifying the order of
integration of all the variables by applying
Augmented Dickey-Fuller (ADF) Test and Phillips-
Parron (P-P) Test. When they are found to have the
same order of integration then continue to conduct
cointegration test (Johansen and Juselius) to identify
the number of cointegrating vectors and cointegrating
equation among the variables. Cointegrating equation
actually implies the long run equilibrium relationship
among the variables.
3 EMPIRICAL RESULT AND
ANALYSIS
It reports the ADF and PP unit root tests for all the
serieswhich the tests are conducted without and with
a time trend. With the exception of JII and IPI, the
ADF and PP tests with and without the time trend for
the variables in levels indicate that they are non-
stationary. The PP test with the time trend, however
suggests that IPI is stationary. When first differenced,
we find evidence that the variables are stationary.
Namely, the PP tests suggest stationarity I(1) in all
variables considered.
Cointegration methodology by Johansen and
Juselius (1990) is utilized in this study. This test is to
identify the number of cointegrating vectors among
the variables.The lag length used in conducting the
cointegration test is based on several criteria which
are commonly used in many empirical studies such as
AIC, SC, LR as well as FPE. According on the
optimal lag length selection criteria, the chosen lag
length for JKSE is two and JII is three.
The cointegration test results suggest that there
exist long run co-movement among the variables.
According to the value of trace statistic, there exist
two cointegrating equations for JKSE and three
cointegrating equations for JII as shown by the value
of Trace statistics which is greater than the 5 percent
critical value. The Trace statistic value of JKSE
(104.0168 > 69.81889, and 56.07896 > 47.85613) and
JII (103.9959 > 69.81889, 53.96119 > 47.85613, and
4.571229 > 3.841466). Furthermore, the Max-Eigen
statistics show that JKSE and JII there are two
cointegrating equations since the values are greater
than the 5 percent critical value. The Max-Eigen
statistics value of JKSE (47.93783>33.87687, and
28.84564>27.58434) and JII (50.03470>33.87687,
and 4.571229> 3.841466). The normalized
cointegration equation is represented as follows:
LJKSE = 7.2034LIPI - 5.7371 LM2 -
2.5680LEXC +11.3983LCPI
LJII = 6.4122LIPI - 5.6408 LM2 - 2.4965LEXC
+11.2883LCPI
From the model above, the long-run relationship
between stock prices (JKSE and JII) and industrial
production is positive, similar to results obtained for
the Vietnam (Hussainy and Ngoc, 2009), USA
(Fama, 1990), Japan (Mukherjee and Naka, 1995),
South Korea (Kwon and Shin, 1999), Malaysia
(Hussin at al, 2012), and Singapore (Maysami and
Koh, 2000).These results indicates that the real sector
ICIEBP 2017 - 1st International Conference on Islamic Economics, Business and Philanthropy
84

of the economy provides a direct impact on the
company’s performance in general which are
represented by the indices (JKSE and JII).The
obtained result also indicates a negative relationship
between exchange rate and both stock prices are
JKSE and JII in the long run, which is consistent with
the work of Ibrahim and Aziz (2003), Asmy at al
(2009), Maysami and Koh (2000), Kwon and Shin
(1999), and Abbas (2011). It means that when
exchange rate increases, it will be followed by
reduction in the JKSE and JII stock prices. This can
be explained by the fact that Indonesian economy is
currently highly dependent on international trade
especially on imports. When a currency depreciates,
it will increase the price of imported raw materials
(from the local currency perspective), which lead to
high production costs.Certainly the company’s profit
got affected and translated into selling more of the
company’s shares (by investors) which if it happens
massively it will lower the indices
The result we obtained also indicates a positive
relationship between CPI and both stock prices are
JKSE and JII in the long run, which is consistent with
the work of Ibrahim and Aziz (2003), Khil and Lee
(2000), and Hosseini and Zamri (2011). This can be
explained that when inflation is reflected in the high
prices, but at the same time followed by high stock
prices, so the issue can be an alternative to cover the
high prices.
Interestingly, this study found a negative
relationship between M2 and both stock prices are JII
and JKSE. According to research conducted by
Ibrahim and Aziz (2003) and Kwon and Shin
(1999).These results are in contrast to studies
conducted by Maysami and Koh (2000), Mukherjee
and Naka (1995), Cheung and Ng (1998) which states
there is a positive relationship between M2 and stock
prices. Effect of money supply on stock prices can be
negative and positive (Ibrahim and Aziz, 2003).When
the money supply increases will affect the purchasing
power of people to buy more goods and services, thus
a positive impact on the real economy (Mukherjee
and Naka, 1995).The increase in the money supply
will affect cash flow and profits, so as to effect the
stock price. Conversely, when the money supply
causes inflation it will make investors choose to
invest in the banking sector with a smaller risk.
Bulmash and Trivoli (1991) argue that the continued
increase in money supply may exert a negative effect
on the stock prices due to increasing inflationary
pressures and subsequent policy orientation to
contain the pressure. Our negative long-run
coefficient seems to indicate the dominance of these
negative channels.
An interesting finding to be discussed is that
money supply is negatively related to stock prices
while consumer prices are positively related to stock
prices. Generally, monetary expansion by increasing
the money supply is inflationary or lead to inflation
thus the expected relationship between the money
supply and stock prices is positive. However,
according to Ibrahim and Aziz (2003) mentioned that
the relationship between M2 and stock prices are not
only determined by inflationary pressures due to
monetary expansion. But still there are some other
variables that can affect inflation. Variables that can
affect inflation besides M2 is the increase in fuel,
electricity, imbalance between the amount of labor
with the demand for goods production, etc. In the
context of Indonesia, the increase of oil in May 2008
caused inflation continued to increase from 1.47 in
April to 2.46 in May. Moreover, an inflation in June
2013 due to again the increase in fuel prices. As a
result of the increase in fuel prices, it creates inflation
to 3.29 in the month of June which was originally
only 1.03 in the month of July. This causes have
intended effects in the short run but generates risk
premiums and uncertainty in the long term,
prompting a negative relation between money supply
and stock prices.
4 CONCLUSIONS
This paper attempts to seek whether macroeconomic
factors can explain the performance of stock markets
of both Islamic and conventional indices. The
macroeconomic variables used in this study include
Industrial Production Index, money supply, exchange
rate, and consumer price index. The analysis relies on
standard and well-accepted techniques of
cointegration and VARs to uncover the long-run
relationship and short-run interactions among the
variables using the data that span for about 14 years.
The inclusion of the macroeconomic variables
certainly help to improve the predictability of the
Indonesian equity prices.
Notice that stock indices can be regarded as
expected future economic activities. Stock indices are
important indicators for the overseas investors who
are keen to make investments. At a time when there
exist increasing trend of the stock indices, it is a signal
that the economy in the particular country is growing
and hence investment can be conducted, vice versa.
For that reason, it is of important to analyse the
factors which could influence the stock indices.
These findings shall provide suggestion to the
government that real sector as represented by GDP or
Macroeconomic Variables and Stock Indices (Islamic and Conventional): Evidence from Indonesia
85

IPI and Exchange rates behaviour are some of the
important macroeconomic indicators that need to be
taken into account. It evidences that these variables
are influencing stock indices especially in the long
run. The need to focus on the stock indices is
important since it contains hot money whereby
money flows in and out very abruptly. Flows in due
to good economic performance and flows out
otherwise. Ensuring the real sector and stabilizing the
exchange rate would lead money to rigidly flow out.
This is important given the fact that Indonesia still
significantly import raw material from abroad and
certainly it affects the overall price of good and
services
The existing Islamic Stock Index is composed of
stocks which are also traded in the general index
(JKSE) which means the stocks are within two or
more indexes. For the further recommendation, it is a
need to think about specific Islamic index whereby it
composes stocks within that islamic index and not
part of general index. This index allow us to seek its
pure contribution of Islamic index to the economy in
general.
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