The impact of macroeconomic volatility on the Indonesian stock market volatility

Abstract

This study examines the relationship between macroeconomic variables volatility (industrial production, exchange rate, inflation rate and money supply) and stock market volatility in Indonesia. Monthly data from January 1986 to December 2013 are employed in this study. Using GARCH (1, 1) and Granger Causality test, the results show that the macroeconomic variables volatility has no impact toward the Indonesian stock market volatility. However, there is only an unidirectional causal relationship running from stock market volatility to exchange rate volatility. Therefore, policy makers should take into account stock market volatility in making any policy related to exchange rate.