Causality Test Inflation and Stock Return in Indonesia Stock Exchange

Ready Prima Dudesy

Abstract


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.


Keywords


inflation, stock return, causality

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References


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DOI: https://doi.org/10.22212/jekp.v9i1.961

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