THE INFLUENCE OF MACROECONOMIC VARIABLES TO STOCK MARKET RETURNS OF

THREE SECTORS (AGRICULTURE, PROPERTY, AND MINING) IN INDONESIA

Ihwanul muslimin

department of economics development, faculty of economics and business,

brawijaya university

ABSTRACT

The objective of this research was to determine the effect of macroeconomic variables such as

inflation (CPI), exchange rate (ER), money supply (M2) and additional dummy variables to

distinguish stock prices of 5000 and stock prices above 5000 on stock returns in three sectors

such as agriculture, mining and property on the Indonesia Stock Exchange and the data used is

panel data consisting of monthly data from 2008 to 2018. Based on the research, it was found

that there was no significant effect between inflation (CPI) and stock market returns and also

The exchange rate variable (ER) has no significant effect on stock market returns. Furthermore,

The money supply (M2) variable has a significant influence on stock market returns. An

increased in money supply (M2) has an impact on increasing stock returns and simultaneously

inflation (CPI), Exchange rate (ER) and money supply (M2) have a significant influence on stock

market returns in the three sectors of agriculture, mining and property.

Keyword:Macroeconomic Variable, Stock Market Returns, Indonesia,Panel analysis

Macroeconomic variables play an important role in the performance of stock market

returns. Numerous studies document that there are link between macroeconomic variables and

stock market returns. It is found that changes in the macroeconomic environment affect the

price of share.. According to the Miseman et al. (2013) studied the impact of macroeconomic

forces on five ASEAN stock market movement, including used as a proxy for stock market
returns and are considered as the dependent variable. Since it is quite impossible to investigate

every potential macroeconomic determinant to explain the variation in stock market return, the

choice of determinants are based on the previous studies, and three macroeconomic

determinants have been chosen to be independent variables in this study namely MS, ER and

CPI.

Geetha et al. (2011) investigated the relationship between the stock market, expected

inflation rate, unexpected inflation rate, exchange rate, interest rate and GDP in the case of

Malaysia, US and China. They used cointegration test to determine the number of cointegrating

vectors, which shows the long-run relationship between the variables. In contrast, the short-run

relationship was determined using the Vector Error Correction model. Their results indicate that

there is a long-run cointegration relationship between stock markets and those variables in

Malaysia, US and China. On the other hand, there is no short-run relationship between the

stock market, unexpected inflation, expected inflation, interest rate, exchange rate and GDP for

Malaysia and US using VEC. However, China’s VEC result shows that there is a short-run

relationship between expected inflation rates and China’s stock market

Over the past few decades in indonesia , the interaction of share returns and the

macroeconomic vari- ables has been a subject of interest among academics and practitioners. It

is often argued that stock prices are determined by some fundamental macroeconomic

variables such as the interest rate, the exchange rate and the inflation. Anecdotal evidence from

the financial press indicates that inves- tors generally believe that monetary policy and

macroeconomic events have a large influence on the volatility of the stock price. This implies

that macroeconomic variables can influence investors’ investment decision and motivates many

researchers to investigate the relationships between share returns and macroeconomic

variables. An accurate estimation of the relationship between macroeconomic variables and

performances of the stock market can enable investors to make better investment decisions. At
the same time, it might help policy makers to make effective decisions and encourage more

capital inflows into the capital market of the country.

this research aims to perform a comparative analysis about the impact of macroeconomic

variables MS, ER, inflation to stock market return of three sectors agriculture, property and

mining in indonesia. Such as the research conducted by Wongbangpo & Sharma (2002) that

investigated the role of selected macroeconomic determinants namely the MS, the ER and the

consumer price index (CPI) on the stock prices in five selected ASEAN countries (Malaysia,

Philippines, Thailand, Indonesia and Singapore). Overall, the Granger causality test detected

the connection between selected macroeconomic determinants toward the stock prices in all

five ASEAN stock market. The results suggested that stock prices in Malaysia, Thailand and

Singapore positively related to MS, yet negative in Philippines and Indonesia. In terms of ER,

stock prices in Indonesia, Malaysia and Philippines were positively related to ER, yet negative in

Singapore and Thailand.

LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT

The relationship between macroeconomic fundamentals and stock market returns have been a

major topic of engagement within the financial economics circus. This relationship is an object of

on-going interest of investors, academics and policymakers. Several theories and empirical

evidence alike have shown much detail on this subject of concern to economies. Literature,

such as that by Markowitz (1959) Sharpe ( 1964), Lintner (1969), Ross (1976), Fama & French

(1995) has provided a theoretical basis by which stocks may be valued. However, the

simplifying assumptions, upon which many of these models are derived and based present key

weaknesses. These weaknesses become increasingly evident in the implementation and

practical application of the model in reality. Nonetheless, from a theoretical point of view, these
models present a sound theoretical foundation on which stock market movement may be

attributed to the influences of the macroeconomic factors.The Capital Asset Pricing Model

(CAPM) and Asset Pricing Theory (APT) are be reference in this study to underpin the

relationship between the stock market and the economic activities

The Capital Asset Pricing Model: Theory and Evidence written by Fama and French, the

theory and evidence for the Capital Asset Pricing Model (CAPM), and the development of the

Fama-French Three-Factor Model (FF3). Behaviorist is critical to the Capital Asset Pricing

Model’s ability to explain the true covariance of market return according to Fama and French.

They argue that the average return premium related to the FF3 model is misleading in terms of

pricing. They explain the empirical evidence for the weak explanatory power of the CAPM,

developed by Sharpe (1964) and Lintner (1969). In the late 1970s, the new variables price-

ratios and size were found to have explanatory power on the return of portfolios. The work of

Fama and French is a significant part of finance and the two models CAPM and FF3.

Fundamentals of Fama and French findings influenced the current global research when they

showed that FF3 produced a better result of estimating average returns on portfolios than

CAPM used on the international market by Fama & French (2004).

Bartholdy & Peare (2005) compared expected returns between the performance of

estimating individual stock returns using CAPM and FF3. The result of the study was shown to

be limited in its explanatory power of the expected returns. On average CAPM explained 3% of

the differences in return and the Fama-French model on average 5%. Testing different intervals

of data frequencies and indexes to see what resulted in the best estimation, it was found that

monthly observations over five years were the best fit. Bartholdy and Peare (2005) found in their

research that the models performed differently using different indexes. They identified that the

best type of index used was the equal-weighted and not the more common value-weighted

index. The analysis in their study was made on the New York Stock Exchange, the U.S. stock

market. In conclusion, the author presents that none of the models produced high significance
results and the explanatory power is too low to be useful for estimating the cost of equity. The

bullet point of this article is that CAPM and FF3 are imperfect models; by applying different

datasets and particular periods, the model yields a different outcome.

Suh (2009) conducted a time-series test on CAPM and FF3 for a specific estimation of the

equity capital in a corporate investment decision-making perspective. The data was collected

from a wide variety of stocks for over five years, conducted daily and monthly. The most

consistent result of the study was the market risk premium. The results of the study show that

the market risk premium, for individual stocks and portfolios, is significant in its results and the

two models worked as complements. CAPM was generally better at estimating the large-growth

portfolio returns and was not able to provide a reasonable estimate for the small-value

portfolios.

Gan et al. (2006) examined the connection between the New Zealand stock market index

and selected macroeconomic determinants using monthly data from January 1990 to January

2003. The study reveals a negative relationship between CPI and stock index as well as MS

determinant.

Ozcan (2012) used Johansen’s cointegration to investigate the long run equilibrium

interaction between selected macroeconomic determinants toward Istanbul Stock Exchange

(ISE) index. The researcher employed monthly data for all the determinants covering the period

from January 2003 to December 2012. The study found that both determinants; MS and ER

depicted a long run equilibrium interaction toward ISE index.

Khodaparasti (2014) examined the role and impact of macroeconomic variables on the

Iranian stock market. Using historical data from 2007 to 2011, the paper shows evidence that

ER poses a greater effect on the stock market compared to inflation and MS. However this

paper failed to depict a significant relationship between MS and CPI towards the stock index

except for ER that shows a significant positive relationship to Iranian stock index.
 Fama (1981) also explains a strong positive correlation between common stock returns

and real economic-variables like capital expenditures, industrial production, real GNP, money

supply, lagged inflation and interest rates. In Nigeria, Soyode (1993) tested the association

between stock prices and macroeconomic variables such as exchange rate, inflation and

interest rate and found that macroeconomic variables are cointegrated with stock prices and

consequently related to stock returns.

Based on the literature reviewed, the current study develops the following hypotheses:

H1: The Money Supply (MS) positively influences stock market returns based on conventional

indices in the selected sector (agriculture, property, mining).

H2: The Exchange Rate (ER) positively influences stock market returns based on conventional

indices in the selected sector (agriculture, property, mining)

H3: The Consumer Price Index (CPI) positively influences stock market returns based on

conventional indices in the selected sector (agriculture, property, mining).

H4: The Money Supply (M2), Exchange Rate (ER) and Consumer Price Index (CPI) together

positively influence stock market returns based on conventional indices in the selected

sectors (agriculture, property, mining).

RESEARCH METHODOLOGY

Research Design

Panel data analysis is used in this research to investigate every potential macroeconomic

determinant to explain the variation in stock market return of three selected sector (agriculture,

property, mining) in 2008 and 2018, the choice of determinants are based upon the previous

studies, three macroeconomic determinants have been chosen to be independent variables in

this study namely MS, ER and CPI.

 Panel data is compared to the purely cross-sectional or purely time-series data sets, the

panel data has several major advantages. First of all, by pooling the data, the panel analysis

increases the accuracy of the parameter estimates. It therefore allows the estimation procedure

to have more degrees of freedom and sample variability. Stata sofware is used conduct the

analysis proses in this research.

Type of Data and Data Collection

This study uses secondary data. The study is conducted in the context of three selected

sector (agriculture, property, mining) in Indonesia. In this study, stock price indices for

conventional is used as a proxy for stock market returns and are considered as the dependent

variable. Since it is almost impossible to investigate every potential macroeconomic determinant

to explain the variation in stock market return three selected sector (agriculture, property,

mining) in Indonesia, the choice of determinants are based upon the previous studies. Three

macroeconomic determinants have been chosen as the independent variables in this study,

namely MS, ER and CPI.

The study uses monthly data for all the variables started from January 2008 to December

2018, which are obtained from www idx.co.id, www.bps.go.id www.bi.go.id and ojk.go.id. The

index used is Indonesia Stock Exchange (IDX).

Variables Description and Expectation

In this section, the results of data processing output are explained in order to answer the

research questions that have been raised previously. Data processing uses panel data with the

help of Stata to analyze the dependent variable in the form of stock market returns of three

sectors (agriculture, property, and mining), and the independent variables are money supply,

exchange rate, and consumer price index (CPI) proxy of inflation. In accordance with the

characteristics of panel data that is a merger between cross-section and time-series data, in the
form of a cross-section that is the object of research consisting of three active companies listed

on the stock exchange such as Ciputra Development Tbk, Bukit Asam Tbk and Astra Agro

Lestari Tbk

Panel least square regression analysis

The study employed a multiple regression model in undertaking the panel analysis as

follows:

𝒀𝒊.𝒕 = 𝜷𝒐 + 𝜷𝟏 𝑿𝟏𝒊𝒕 + 𝜷𝟐 𝑿𝟐𝒊𝒕 + 𝜷𝟑 𝑿𝟑𝒊𝒕 + 𝜷𝟒 𝑿𝟒𝒊𝒕 + 𝒆𝒊,𝒕

Where t = 1……, T refers to the time period and i =1……, N refers to the members of the

panel while k = 1……, K refers to the specific coefficient of variable. Yit and Xit refer to the

dependent and independent variable, respectively for sector i at time t. Finally, e refers to the

random error in the equation.

Through the use of panel data analysis, it was possible to investigate the impact of the

macroeconomic determinants on the stock returns three selected sector (agriculture, property,

mining) in Indonesia,

3.3.3 Conventional Indices

Panel I:

𝒀𝒊.𝒕 = 𝜷𝒐 + 𝜷𝟏 𝑿𝟏𝒊𝒕 + 𝜷𝟐 𝑿𝟐𝒊𝒕 + 𝜷𝟑 𝑿𝟑𝒊𝒕 + 𝜷𝟒 𝑿𝟒𝒊𝒕 + 𝒆𝒊,𝒕

Where

𝒀 = the market return of stock price index at the period

𝑿𝟏 = the monthly-end M2 money supply;

𝑿𝟐 = the monthly-end real effective exchange rate

𝑿𝟑 = the monthly-end consumer price index,

X4= dummy variable is a variable to distinguish the stock price that more than Rp 5000 or less

than Rp 5000

𝒊 = the sector selected

𝒕 = time series

𝒆 = represent the error term for each model.

RESULTS AND DISCUSSION

The following statistical analysis of the variables was used in the research model. The statistical

analysis and research data processing that will explain the model in panel data regression,

model testing and selection, and classic assumption tests to produce research that is BLUE

(Best Linear Unlock Estimator).

Table 1: The Results of Descriptive Statistic

Variable Obs Mean Std. Dev Min Max

Y 396 7464.469 8420.571 90.45 30110.1

X1 396 15.00124 3859784 14.27723 15.56646

X2 396 9.312473 1777725 9.046998 9.627899

X3 396 4.837306 .0852524 4.701207 5.099927

X4 396 .3434343 4754556 0 1

Source: Stata Output

Based on statistics descriptive of the variables used in the research model in

accordance with the table above, the descriptive analysis of each variable includes the

following:
 From 396 observations, it can be seen that the average value of the variable stock

market returns for the period 2008 to 2018 is log 7464,469 with a standard deviation of

8420,571 percent. The company with the lowest share price is Ciputra Development Tbk with

the CTRA code in 2008, amounting to Rp90.45, while the company with the highest share price

was Agro Lestari Tbk with the AALI code in 2008 which amounted to Rp30110.1.

The average value of the money supply (M2) variable during the period 2008 to 2018

was 15.00 percent with a standard deviation of 3857 percent. The lowest money supply (M2)

occurred in 2008 of 14.27 percent or Rp1,588,962 billion, while the highest money supply level

occurred in 2018 which was 15.56 percent or Rp5,760,046.2 billion

The average value of the exchange rate variable during the period 2008 to 2018 was log

9.33 with a standard deviation log .1777 The lowest exchange rate occurred in 2011 in the

amount of log 9.04 or Rp8,945.00, while the highest exchange rate occurred in 2018, which was

the log 9.62 or Rp15,182.50.

The average value of the consumer price index variable during the period 2008 to 2018

was 4.837 percent, with a standard deviation of 0.805 percent. The lowest consumer price index

occurred in 2008 log 4.70 or 110.08 percent, while the value of the highest consumer price

index occurred in 2018 log 5.09 or 135.39 percent.

Goodness of Fit Model Testing

Hypothesis testing in research is essential. It can determine whether the research

conducted is scientific or not. To determine the feasibility of the model scientifically, based on

the three estimation models that have been carried out, namely pooled least square, fixed effect

model, and random effect.

Table 2: The Results of Goodness of Fit Model Testing

 Model T test F test R2 Coefficie Constanta Wald
nt chi2

Fixed P- T-test prob F

Effect value

(X1) 0.005 2.80

1734.057
0.2021
(X2) 0.000 -5.72 -7633.778
0.0000 24.64
55096.74 3299.98
(X3) 0.459 -0.74 -1204.718

(X4) 0.000 7.13 9526.354

Source: Stata Output

Based on the comparison of the outputs above, seen from the value of t test, f test,

determinant coefficient (R2), coefficient and constant, the fixed effect model is the appropriate

approach compared to the random effect model and pooled least square.

The Following Discussion of Hypotheses

 Hypothesis testing 1: money supply (M2) has a significant influence on stock market

returns

The money supply variable gives the estimated positive coefficient according to the initial

hypothesis. The t-test results show that the money supply variable has a significant influence on

stock market returns at alpha 5 percent. Furthermore, regarding the magnitude of the effect of

money supply (M2) on stock market returns, it can be seen from the regression coefficient value

of the money supply variable that is 1734,057. It shows that when the money supply has

increased by 1 rupiah, stock market returns will increase by 1734,057 percent.

  Hypothesis testing 2: exchange rate has a significant influence on stock market returns

The exchange rate variable gives a negative coefficient estimation result, not in

accordance with the initial hypothesis, but the t-test results show that the exchange rate variable

has no significant influence on stock market returns at alpha 5 percent. Furthermore, regarding

the magnitude of the effect of the exchange rate on stock market returns, it can be seen from

the regression coefficient value of the exchange rate variable that is -7633.778. It shows that

when the exchange rate increases by 1 Rupiah, stock market returns will increase by -7633.778

percent.

 Hypothesis testing 3: the consumer price index has a significant influence on stock

market returns

Consumer price index variable gives the estimated coefficient negative, not in

accordance with the initial hypothesis. T-test results indicate that the variable consumer price

index has no significant influence on stock market returns at a significance level of 5 percent.

Furthermore, the magnitude of the effect of the consumer price index on stock market returns

can be seen from the regression coefficient value of the consumer price index variable of -

1204.718. It shows that when the consumer price index increases by 1 percent, stock market

returns will increase by 0.0616612 percent.

 Hypothesis testing 4: money supply (M2), exchange rate, and consumer price index

together have a significant influence on stock market returns

Chi square probability results have a value of 0.0000. It shows that together the

regression coefficient has a significant value, meaning that the independent variables jointly

have an influence on the dependent variable. So, it can be said that the model used is quite

good. Wald chi2 value in the results of this regression has a value of 3299.98, which is greater
than the value of Ftable 2.97. It has the same meaning that all the independent variables

together have a significant effect on the dependent variable namely stock market returns.

CONCLUSION AND IMPLICATIONS

The findings of this research seem to give the same result that the conventional index is

influenced by macroeconomic variables with a similar pattern. However, as expected, variable

macroeconomics had an even bigger effect. As illustrated in Table 2, the results show that

conventional stock indeces are more responsive to macroeconomic changes. The results also

show evidence that M2 as a proxy has a greater effect on stock market returns compared to ER

and CPI. The positive correlation between the M2 rand the stock market returns can be

explained by the fact that the excess money supply will have a direct effect on capital market

returns

when the money supply is increasing, there is a tendency for increased overall economic

activity, this is because companies get more supply than before. When the money supply

increases, profit oriented operational activities will increase, and it will also increase stock

returns to the company. Macroeconomic factors are factors outside the company that affect the

increase or decrease of company performance. The effect of economic factor conditions is the

basis of securities analysis, where if economic conditions are bad, then the rate of return of

shares in circulation might reflect a comparable decline. If a country's economy grows

sustainably, with reasonable good macro variables, such as controlled inflation and an attractive

monetary situation, investors will be interested in investing their money in the stock exchange.

Conversely, if the country's economy deteriorates, the political situation is unstable, there are

many economic and monetary scandals, then investors will immediately prepare to withdraw

funds invested in these exchanges. Investors always want to maximize expected returns based

on their tolerance level to risk.

 because the results will be able to bring impact on capital markets in indonesia . On at the

same time, policymakers must take timely action to minimize any vulnerability due to inequality

in terms of markets capitalization. Any strategy that doesn't make sense will dwarf the other

stocks exchanges in indonesia

Research Limitations

This research has been done as well as possible, but due to the limitations of

researchers, this study still has some weaknesses, including the following:

 Many factors influence the stock market returns, but this study only uses three variables,

namely money supply, exchange rate, and consumer price index. So, the results

obtained are less able to explain variations in the stock market return variable.

 This research only limits the proxy for share developments in Indonesia through sub-

sectors listed at LQ45, even though there are many other stock indices.

 The research period is only ten years, so the results obtained may not be consistent with

the results of previous studies.

 All significant variables should be high R2, but in this study low R2 is equal to 20.21%. It

is because there are still many other factors that influence the stock market returns,

which have not been included in the model.

Suggestion

Based on the conclusions and limitations of this study, the following suggestions can be

submitted:

 The government must maintain the stability of the Indonesian currency exchange rate by

reducing the trade balance deficit. The government must reduce oil and gas imports and

increase oil production capacity at domestic refineries and increase the production of
 Crude Palm Oil (CPO) to support the energy mix target renewable by 23% in 2025. The

government must gradually increase the content of palm oil in biodiesel or biodiesel from

10% (B10) to 20% (B20) in accordance with Decree of the Director General of Oil and

Gas No. 28 in 2016. Also, pushes up to B100 or 100 percent fuel from biodiesel. In the

non-oil and gas sector, the government must open of investment in the Minera sector

because Indonesia is a country with abundant natural resources, especially mineral

mining which has been one of the largest mineral production in the world. The mineral

and coal sub-sector are still a significant contributor to state revenues. As of June 2018,

Rp20.1 trillion flowed into the state treasury which came from royalties, mining product

sales, and fixed mineral contributions. Knowing the wealth of our mineral and coal

resources has become an important task of the Government, so that development

planning and policy development involving the mineral and coal sector can take place

better. Moreover, the government must expand access and reach non-traditional export

markets. With ongoing down streaming and connectivity through market identification,

trade attaches are left to promote.

When Indonesian exports increase and imports decrease, it will directly influence

the decrease Current Account Deficit (CAD) and finally will strengthen the Indonesian

currency Exchange rate.

 The government and Indonesia central bank must coordinate fiscal and monetary

policies to maintain economic conditions. Good supervision and banking arrangements

are needed so that macroeconomic stability and economic development can be

maintained. Because further coordination is needed for institutions such as the Financial

Services Authority (OJK) so that coordination can be better maintained, and also

maintain inflation stability and cash on hand.

 Investors should understand the stability of fiscal and monetary policies in a country

before investing. The most important thing is political stability because it can directly
 affect the movement of the composite stock price index on the IDX so that it can be used

as part of the consideration to predict stock market returns, and then it can make

investment decisions.

 Investors should use fundamental analysis and technical analysis to calculate stock

market returns and trading volume before making an investment decision. This

information has been shown to influence the movement of the composite stock price

index on the IDX both simultaneously and partially.

 As an alternative financing institution, the government must encourage the capital

market by providing incentives for businesses to become listed companies in the capital

market, and the government must make policies to increase Gross Domestic Product

(GDP). In the end, it will influence the sectoral stock price index.

 We recommend that investors also use other information that can be used as a

reference in making investment decisions because there are many other factors that

influence the movement of stock price indexes besides the three variables used in this

study.

 The government must be wise in controlling macroeconomic conditions so that the

economy remains stable and healthy so that it can increase the passion for investment

in the country.

 This study only uses three variables as factors that influence the stock market returns,

while the factors that influence stock market returns are certainly more than those used

in this study. Therefore, for further research it is expected to use a combination with

other independent variables.

 This study uses a long-term estimate. Short-term estimation or dynamic estimation is

suggested to be done for the future research.

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