Causality Test Inflation and Stock Return in Indonesia Stock Exchange

Ready Prima Dudesy


Investors can see the inflation rate as one of the basic investment decisions. The inflation rate has affected stock returns in overseas studies with diverse directions. Further research is important to provide an overview of the effect of Indonesia's inflation rate and stock returns that are useful for analyst to predict macroeconomic conditions as well as investment decisions. This study aims to identify the relationships between inflation and stock return in Indonesia’s Stock Exchange and identify the effect of inflationary shock to stock returns in Indonesia’s Stock Exchange. The research method used in this study are Vector Autoregression and Granger causality/Wald exogeneity block test. The result showed that Indonesia's inflation rate did not significantly affect stock returns, but when the analysis proceeded more specifically into sectoral stock returns, it was seen that Indonesia's inflation rate has significantly affected the stock returns of Basic Industry sector and Infrastructure sector. Inflation rate shocks was responded negatively by the sectors. Further findings were the causality relationship between the inflation rate of Indonesia and the stock return of Basic sector. The return of Jakarta Composite Index affected the inflation rate of Indonesia. Specific sectors that have influenced inflation rate were Agriculture sector, Basic Industry sector and Financial sector.


inflation, stock return, causality

Full Text:



Bodie, Z. (1976). Common stocks as a hedge against inflation. Journal of Finance. 31: 459-470.

Canto, A., Victor., Findly C., & Reinganum, M. (1983). The monetary to stock return and inflation. Southern Economic Journal. 50(2).

Fama, E.F., & Schwert G.W. (1977). Asset returns and inflation. Journal of Financial Economics. 5: 115-146.

Fama, E.F., (1981). Stock returns, real activity, inflation and money. American Economic Review. 71(4): 545-565.

Feldstein, M. (1980). Inflation, tax rules and the stock market. American Economics Review. 70(5): 839-847.

Hess, Patrick J., & Lee B.S. (1999). Stocks returns and inflation with supply and demand disturbance. The Review of Financial Studies. 12(5): 1203–1218.

Ioannidis, C., & Kontonikas, A. (2008). The impact of monetary policy on stock prices. Journal of Policy Modeling. 30(1): 33-53.

Jaffe, J., & Mandelker, G. (1976). The fisher effect for risky assets: An empirical investigation. Journal of Finance. 31: 447-458.

Lintner, J. (1973). Inflation and common stock prices in a cyclical context. New York: National Bureau of Economic Research 53rd Annual Report.

Modiglian, F., & Cohn R.A. (1978). Inflation rational valuation and the market. Financing Analysts Journal. 35: 24-24.

Nelson, C.R. (1976). Inflation and rate of return on common stocks. The Journal of Finance. 31: 471-483.

Ozurumba, B.A. (2012). The impact of stock market return on foreign portfolio investment in Nigeria. IOSR Journal of Business and Management. 2(4): 10-19.

Pindyck, R.S. (1984). Risk, inflation and the stock market. American Economic Review. 74(3): 335-351.

Ritter, J.R., & Warr R.S. (2002). The decline of inflation and the bull market of 1982-1999. Journal of Financial and Quantitative Analysis. 37(1): 27-61.

Sharpe, S.A. (2002). Re–examine stock valuation: The implications of analysis earnings forecast. The Review of Economics and Statistics. 84(4): 632 - 648.

Snead, M.C. (1998). Causality tests of the stock price inflation. Unpublished doctoral dissertation, Oklahoma State University, Oklahoma.



  • There are currently no refbacks.

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.

Copyright of JEKP (e-ISSN:2528-4673 p-ISSN:2086-6313).