A STUDY OF INDONESIA’S STOCK MARKET: HOW PREDICTABLE IS IT?
Keywords:
Stock returns, Predictability, Macro predictors, Investor utility
Abstract
Using monthly data from January 1995 to December 2017, this paper tests whether
Indonesian stock index returns are predictable. In particular, we use eight macro
variables to predict the Indonesian composite and six sectoral index returns using the
feasible generalized least squares estimator. Our results suggest that the Indonesian
stock index returns are predictable. However, the predictability depends not only on
the macro predictor used but also on the indexes examined. Second, we find that the
most popular predictor is the exchange rate, followed by the interest rate. Finally, our
main findings hold for a number of robustness tests.
Downloads
Download data is not yet available.
References
Bannigidadmath, D., & Narayan, P.K. (2015). Stock Return Predictability and
Determinants of Predictability and Profits. Emerging Market Review, 153-173.
Bossaerts, P., & Hillion, P. (1999). Implementing Statistical Criteria to Select Return
Forecasting Models: What Do We Learn? Review of Financial Studies, 12, 405-428.
Butler, A., Grullon, G., & Weston, J. (2005). Can Managers Forecast Aggregate
Market Return? Journal of Finance, 60, 963-986.
Campbell, J., & Shiller, R. (1988). The Dividend-Price Ratio and Expectations of
Future Dividends and Discount Factors. Review of Financial Studies, 1, 195-228.
Campbell, J., & Thompson, S. (2008). Predicting Excess Stock Returns Out of
Sample: Can Anything Beat the Historical Average? The Review of Financial
Studies, 24, 1509-1531.
Campbell, J. (1987). Stock Returns and the Term Structure. Journal of Financial
Economics, 18, 373-399.
Devpura, N., Sharma, S., & Narayan, P.K. (2017). Is Stock Return Predictability
Time-Varying? Journal of International Financial Markets, Institutions and Money,
DOI: https://doi.org/10.1016/j.intfin.2017.06.001
Driesprong, G., Jacobsen, B., & Maat, B. (2008). Striking Oil: Another Puzzle?
Journal of Financial Economics, 89, 307-327.
Fama, E., & French, K. (1989). Business Conditions and Expected Return on Stocks and
Bonds. Journal of Financial Economics, 25, 23-49.
Fama, E. (1981). Stock Returns, Real Activity, Inflation and Money. American
Economic Review, 71, 545–565.
Goyal, A., & Welch, I. (2003). Predicting the Equity Premium with Dividend Ratios.
Management Science, 49, 639-654.
Gupta, R., & Modise, M.P. (2012). South African Stock Return Predictability in
the Context of Data Mining: The Role of Financial Variables and International
Stock Returns. Economic Modelling, 29, 908–916.
Gupta, R., & Modise, M.P. (2013). Macroeconomic Variables and South African
Stock Return Predictability. Economic Modelling, 30, 612–622.
Han, L., Lv, Q., & Yin, L. (2017). Can Investor Attention Predict Oil Prices? Energy
Economics, 66, 547-558.
Kothari, S., & Shanken, J. (1997). Book-to-Market, Dividend Yield and Expected
Market Returns: A Time Series Analysis. Journal of Financial Economics, 44, 169-
203.
Kuo, C-Y. (2018). Are The Forecast Errors Of Stock Prices Related to the Degree of
Accounting Conservatism? Journal of Applied Finance & Banking, 8, 6, 201-242.
Lamont, O. (1998). Earnings and Expected Returns. Journal of Finance, 53, 1563-1587.
Lewellen, J. (2004). Predicting Returns with Financial Ratios. Journal of Financial
Economics, 74, 209-235.
Narayan, P.K, Sharma, S., Poon, W., & Westerlund, J. (2014). Do Oil Prices Predict
Economic Growth? New Global Evidence. Energy Economics, 41, 137-146.
Narayan, P.K., & Bannigidadmath, D. (2015). Are Indian Stock Returns Predictable?
Journal of Banking & Finance, 58, 506–531.
Narayan, P.K., & Gupta, R. (2015). Has Oil Price Predicted Stock Returns for Over
a Century? Energy Economics, 48, 18-23.
Narayan, P.K., Phan, D. H. B., Narayan, S., & Bannigidadmath, D. (2017a). Is There
a Financial News Risk Premium in Islamic Stocks? Pacific-Basin Finance Journal,
42, 158-170.
Narayan, P.K., Phan, D. H. B., & Sharma, S. (2017b). Are Islamic Stock Returns
Predictable? A Global Perspective. Pacific-Basin Finance Journal, 40A, 210-223.
Narayan, P.K., Phan, D.H.B, Thuraisamy, K., & Westerlund, J. (2016a). Price
Discovery and Asset Pricing. Pacific-Basin Finance Journal, 40, 224–235.
Narayan, P.K., Phan, D.H.B., Narayan, S. (2018). Technology-Investing Countries
and Stock Return Predictability. Emerging Markets Review, 36, 159-179.
Narayan, P.K., Phan, D.H.B., Sharma, S.S., & Westerlund, J. (2016b). Are Islamic
Stock Returns Predictable? A Global Perspective. Pacific-Basin Finance Journal,
40, 210– 233.
Narayan, P.K., & Sharma, S. (2015). Is Carbon Emissions Trading Profitable?
Economic Modelling, 47, 84-92.
Narayan, P.K., Sharma, S., & Thuraisamy, K.S. (2015). Can Governance Quality
Predict Stock Market Returns? New Global Evidence. Pacific-Basin Finance
Journal, 35A, 367-380.
Phan, D.H.B., Sharma, S. S., Narayan, P. K. (2015). Stock Return Forecasting: Some
New Evidence. International Review of Financial Analysis, 40, 38-51.
Phan, D.H.B.., Sharma, S., & Tran, V.T. (2018). Can Economic Policy Uncertainty
Predict Stock Returns? Global Evidence. Journal of International Financial
Markets, Institutions and Money, DOI: https://doi.org/10.1016/j.intfin.2018.04.004.
Pontiff, J., & Schall, L. (1998). Book-to-Market Ratios as Predictors of Market
Returns. Journal of Financial Economics, 49, 141-160.
Rapach, D., Wohar, M., & Rangvid, J. (2005). Macro Variables and International
Stock Return Predictability. International Journal of Forecasting, 21, 137-166.
Salisu, A., & Ademuyiwa, I. (2018). Revisiting the Forecasting Accuracy of Phillips
Curve: The Role of Oil Price. Energy Economics, 70, 334-356.
Salisu, A., Swaray, R., & Oloko,T. (2018). Improving the Predictability of the Oil–
US Stock Nexus: The Role of Macroeconomic Variables. Economic Modelling,
DOI: https://doi.org/10.1016/j.econmod.2018.07.029
Sharma, S. (2016). Can Consumer Price Index Predict Gold Price Returns? Economic
Modelling, 55, 269-278.
Stambaugh, R. (1999). Predictive Regressions. Journal of Financial Economics, 54,
375-421.
Welch, I., & Goyal, A. (2008). A Comprehensive Look at the Empirical Performance of
Equity Premium Prediction. Review of Financial Studies, 21, 1455-1508.
Westerlund, J., & Narayan, P. (2012). Does The Choice of Estimator Matter When
Forecasting Stock Returns. Journal of Banking and Finance, 36, 2632-2640.
Westerlund, J., & Narayan, P. (2015). Testing for Predictability in Conditionally
Heteroskedastic Stock Returns. Journal of Financial Econometrics, 13, 342–375.
Determinants of Predictability and Profits. Emerging Market Review, 153-173.
Bossaerts, P., & Hillion, P. (1999). Implementing Statistical Criteria to Select Return
Forecasting Models: What Do We Learn? Review of Financial Studies, 12, 405-428.
Butler, A., Grullon, G., & Weston, J. (2005). Can Managers Forecast Aggregate
Market Return? Journal of Finance, 60, 963-986.
Campbell, J., & Shiller, R. (1988). The Dividend-Price Ratio and Expectations of
Future Dividends and Discount Factors. Review of Financial Studies, 1, 195-228.
Campbell, J., & Thompson, S. (2008). Predicting Excess Stock Returns Out of
Sample: Can Anything Beat the Historical Average? The Review of Financial
Studies, 24, 1509-1531.
Campbell, J. (1987). Stock Returns and the Term Structure. Journal of Financial
Economics, 18, 373-399.
Devpura, N., Sharma, S., & Narayan, P.K. (2017). Is Stock Return Predictability
Time-Varying? Journal of International Financial Markets, Institutions and Money,
DOI: https://doi.org/10.1016/j.intfin.2017.06.001
Driesprong, G., Jacobsen, B., & Maat, B. (2008). Striking Oil: Another Puzzle?
Journal of Financial Economics, 89, 307-327.
Fama, E., & French, K. (1989). Business Conditions and Expected Return on Stocks and
Bonds. Journal of Financial Economics, 25, 23-49.
Fama, E. (1981). Stock Returns, Real Activity, Inflation and Money. American
Economic Review, 71, 545–565.
Goyal, A., & Welch, I. (2003). Predicting the Equity Premium with Dividend Ratios.
Management Science, 49, 639-654.
Gupta, R., & Modise, M.P. (2012). South African Stock Return Predictability in
the Context of Data Mining: The Role of Financial Variables and International
Stock Returns. Economic Modelling, 29, 908–916.
Gupta, R., & Modise, M.P. (2013). Macroeconomic Variables and South African
Stock Return Predictability. Economic Modelling, 30, 612–622.
Han, L., Lv, Q., & Yin, L. (2017). Can Investor Attention Predict Oil Prices? Energy
Economics, 66, 547-558.
Kothari, S., & Shanken, J. (1997). Book-to-Market, Dividend Yield and Expected
Market Returns: A Time Series Analysis. Journal of Financial Economics, 44, 169-
203.
Kuo, C-Y. (2018). Are The Forecast Errors Of Stock Prices Related to the Degree of
Accounting Conservatism? Journal of Applied Finance & Banking, 8, 6, 201-242.
Lamont, O. (1998). Earnings and Expected Returns. Journal of Finance, 53, 1563-1587.
Lewellen, J. (2004). Predicting Returns with Financial Ratios. Journal of Financial
Economics, 74, 209-235.
Narayan, P.K, Sharma, S., Poon, W., & Westerlund, J. (2014). Do Oil Prices Predict
Economic Growth? New Global Evidence. Energy Economics, 41, 137-146.
Narayan, P.K., & Bannigidadmath, D. (2015). Are Indian Stock Returns Predictable?
Journal of Banking & Finance, 58, 506–531.
Narayan, P.K., & Gupta, R. (2015). Has Oil Price Predicted Stock Returns for Over
a Century? Energy Economics, 48, 18-23.
Narayan, P.K., Phan, D. H. B., Narayan, S., & Bannigidadmath, D. (2017a). Is There
a Financial News Risk Premium in Islamic Stocks? Pacific-Basin Finance Journal,
42, 158-170.
Narayan, P.K., Phan, D. H. B., & Sharma, S. (2017b). Are Islamic Stock Returns
Predictable? A Global Perspective. Pacific-Basin Finance Journal, 40A, 210-223.
Narayan, P.K., Phan, D.H.B, Thuraisamy, K., & Westerlund, J. (2016a). Price
Discovery and Asset Pricing. Pacific-Basin Finance Journal, 40, 224–235.
Narayan, P.K., Phan, D.H.B., Narayan, S. (2018). Technology-Investing Countries
and Stock Return Predictability. Emerging Markets Review, 36, 159-179.
Narayan, P.K., Phan, D.H.B., Sharma, S.S., & Westerlund, J. (2016b). Are Islamic
Stock Returns Predictable? A Global Perspective. Pacific-Basin Finance Journal,
40, 210– 233.
Narayan, P.K., & Sharma, S. (2015). Is Carbon Emissions Trading Profitable?
Economic Modelling, 47, 84-92.
Narayan, P.K., Sharma, S., & Thuraisamy, K.S. (2015). Can Governance Quality
Predict Stock Market Returns? New Global Evidence. Pacific-Basin Finance
Journal, 35A, 367-380.
Phan, D.H.B., Sharma, S. S., Narayan, P. K. (2015). Stock Return Forecasting: Some
New Evidence. International Review of Financial Analysis, 40, 38-51.
Phan, D.H.B.., Sharma, S., & Tran, V.T. (2018). Can Economic Policy Uncertainty
Predict Stock Returns? Global Evidence. Journal of International Financial
Markets, Institutions and Money, DOI: https://doi.org/10.1016/j.intfin.2018.04.004.
Pontiff, J., & Schall, L. (1998). Book-to-Market Ratios as Predictors of Market
Returns. Journal of Financial Economics, 49, 141-160.
Rapach, D., Wohar, M., & Rangvid, J. (2005). Macro Variables and International
Stock Return Predictability. International Journal of Forecasting, 21, 137-166.
Salisu, A., & Ademuyiwa, I. (2018). Revisiting the Forecasting Accuracy of Phillips
Curve: The Role of Oil Price. Energy Economics, 70, 334-356.
Salisu, A., Swaray, R., & Oloko,T. (2018). Improving the Predictability of the Oil–
US Stock Nexus: The Role of Macroeconomic Variables. Economic Modelling,
DOI: https://doi.org/10.1016/j.econmod.2018.07.029
Sharma, S. (2016). Can Consumer Price Index Predict Gold Price Returns? Economic
Modelling, 55, 269-278.
Stambaugh, R. (1999). Predictive Regressions. Journal of Financial Economics, 54,
375-421.
Welch, I., & Goyal, A. (2008). A Comprehensive Look at the Empirical Performance of
Equity Premium Prediction. Review of Financial Studies, 21, 1455-1508.
Westerlund, J., & Narayan, P. (2012). Does The Choice of Estimator Matter When
Forecasting Stock Returns. Journal of Banking and Finance, 36, 2632-2640.
Westerlund, J., & Narayan, P. (2015). Testing for Predictability in Conditionally
Heteroskedastic Stock Returns. Journal of Financial Econometrics, 13, 342–375.
Published
2019-02-27
How to Cite
Phan, D., Nguyen, T. T., & Nguyen, D. (2019). A STUDY OF INDONESIA’S STOCK MARKET: HOW PREDICTABLE IS IT?. Buletin Ekonomi Moneter Dan Perbankan, 21, 465-476. https://doi.org/10.21098/bemp.v0i0.969
Section
Articles
Copyright (c) 2019 Buletin Ekonomi Moneter dan Perbankan
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
Buletin Ekonomi Moneter dan Perbankan / Bulletin of Monetary Economics and Banking is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
