The Impact of Macroeconomic Variables on Sectoral Indices in Indonesia

This study aims to examine the effect of macroeconomic variables on sectoral indices in the Indonesian Stock Exchange. The difference in sensitiveness among sectors is an interesting issue to investigate this relationship in an emerging market, such as Indonesia. This study employs ordinary least square (OLS) as an estimation method with monthly time-series data from January 2005 to December 2014. The results document that the interest rate, inflation rate, and exchange rate simultaneously have a significant effect on sectoral indices in Indonesia. The interest rate partially shows a significant negative influence on all sectors except basic industry and chemical, finance, infrastructure, utilities, and transportation, and miscellaneous industry sectors. The inflation rate partially has no significant effect on all sectors. The exchange rate partially has a significant negative impact on all industries.DOI: 10.15408/etk.v16i1.4323


INTRODUCTION
The existence of Indonesia stock market adds alternative financial instruments in the form of marketable securities to the investor. The stock is the most sensitive financial assets to economic condition. It has higher fluctuation in price compared to other financial assets. The internal and external factors determine the fluctuation of the stock price. The internal factors are controllable because the management of a firm can manage them. On the other hand, the external factors are uncontrollable especially macroeconomic factors which affect the whole economy. Therefore, the external factors are riskier than the internal factors. The firms should take more attention on the fluctuation of macroeconomic movements for their sustainability (Barakat et al., 2016).
Stock price movements are highly sensitive to macroeconomic factors such as interest rate, inflation, and exchange rate (Shafana, 2014). The interested parties of stock market focus on what factors and at which level their impact on stock price. Policy makers can predict the effect of current and upcoming policies and regulations. Investors can make a better decision when they understand this relationship and take action to decrease their exposure to risk.
Many previous studies have examined the impact of macroeconomic variables on stock market performance in developed countries. Fama (1981) and Chen et al. (1986) examined the long-term relationship between the macroeconomic variables and changes in stock price in the United States. They found that there is a long-term relationship between macroeconomic variables and stock market performance. Fama (1981) revealed that there is a strong positive correlation between stock returns and real economic variables like industrial production, money supply, real GNP, capital expenditures, lagged inflation, and interest rate. Chen et al. (1986) found that the economic variables that affect stock market performance are inflation, aggregate production, short-term interest rates, default risk premium, and the maturity risk premium. Mukherjee and Naka (1995) showed that there is a significant relationship between inflation, money supply, exchange rate, and industrial production and stock prices in Japanese stock market.
Some recent studies investigate the impact of macroeconomic variables on stock market performance in emerging equity markets. The nature of the relationship between macroeconomic variables and stock market performance in developed countries may differ from developing countries. Barakat et al. (2016)  January 1998 to January 2014. They find that there is a causal connection between the market index and interest rate, consumer price index (CPI), exchange rate, and money supply. The same results go for Tunisia except for CPI. Shafana (2014) shown that exchange rate, interest rate, and inflation rate are standard variables to explain the variability of all sectoral indices except for Telecom sector. Tangjitprom (2012) finds that macroeconomic variables can explain stock return significantly after adjusting for some lags. These studies conclude that macroeconomic variables can explain the stock market performance. The impact of some macroeconomic variables could differ from one market to another and from one period to another (Barakat et al., 2001). Pramod-Kumar and Puja (2012) states that reinvestigating the nature of the relationship between the stock market and the macroeconomic factors will be appropriate and essential for investors. Investors should be aware of the relationship between macroeconomic variables and the stock market so that they can invest more prudently and efficiently.
This study employs three macroeconomic variables, namely the interest rate, inflation rate, and exchange rate because these three variables are monetary variables. The difference in sensitiveness among sectors will be an interesting point to examine this relationship in other emerging markets. Given such motivations, this paper gives the useful insight to the government and investor. A deeper understanding of the relationship between macroeconomic variables and sectoral indices in Indonesia will provide direction for the government to stabilize the stock market and the economy as a whole.  This study employs ordinary least square as an estimation method. Following Shafana (2014), the research model of this study takes the following equation.

METHOD
is the sectoral index at time t, is the Bank Indonesia Certificates (SBI) rate at time t, is the consumer price index at time t, is the exchange rate between Rupiah and US Dollar at time t, and is an error term. All research variables are in the form of the natural logarithm.

RESULTS AND DISCUSSION
The descriptive statistics for the research variables during the period from January  Table 3, this study presents the correlation structure of the independent variables. The exchange rate has no significant correlation with inflation. On the other hand, the interest rate has a significant correlation with the inflation rate and exchange rate.
The correlations are lower than 0.8. Therefore, the correlation analysis between independent variables clearly reveals that no multicollinearity exists among independent variables.  The partial effect of each macroeconomic variable is tested by looking at their coefficients and significance values. At the 5% significance level, the coefficients of interest rate are significantly negative for all sectors except basic industry and chemical, finance, infrastructure, utilities, and transportation, and miscellaneous industry sectors. The range of coefficients of interest rate is less than one, between -0.064 and -0.542. It indicates that the interest rate is not a powerful variable on all sectors and when the interest rate rises by one unit the sectoral indices will drop by less than one unit when other variables are held constant. The interest rate has a maximum influence on the agricultural sector with a significant coefficient of -0.542, while it has a minimum impact on finance sector with an insignificant coefficient of -0.064. This finding is consistent with Geske and Roll (1983), French et al. (1987), Wasserfallen (1989), Gjerde and Saettem (1999), and Shafana (2014).
When raising the interest rate on Treasury securities, investors wish to switch off the investment in shares and invest in Treasury securities causing the stock price fall. It means that increase in interest rate leads to lower stock price.
The coefficients of inflation rate show that inflation rate shows the negative relationship for all sectoral indices, but they are insignificant at the 5% level. It means that the variability of all sectoral indices is not determined by the variation of inflation rate in The range of coefficients of the exchange rate is greater than one in all sectors except consumer goods industry. Mining sector involves on import and export activities.
Therefore, the exchange rate shows the highest impact on this industry.  Bilson et al. (2001), Ibrahim and Aziz (2003), Kim (2003), Shafana (2014), and Majid (2016)  The phenomenons that should observe in stock exchange are bearish and bullish. Usman (2016) found that there were 61 bearish (38.85%) and 96 time bullish (61.15%) patterns in IDX composite. Sutrisno (2017) found that there are a positive relationship between volatility and trading frequency in the Indonesian stock exchange. Beik and Fatmawati (2014) found that macroeconomics variables such as M2 and Islamic Certificate of Bank Indonesia (SBIS) had an affect on Jakarta Islamic Index. Majid (2016) show that there is cointegration between Islamic stock prices and macroeconomics variables. Besides that, Majid (2016) also found that money supply had an impact on Islamic stock return in Indonesia. Tanjung (2014) shows that the return of Jakarta Islamic index is much volatile than the theory predicted. Tulasmi and Trihariyanto (2016) Islamic stock index performance in Indonesia better than in Malaysia by using Treynor and Jensen methods.
Otherwise, using the Sharpe method shows that Islamic stock index in Malaysia is better than in Indonesia.

CONCLUSION
The purpose of this study is to investigate the impact of macroeconomic variables on sectoral indices in the Indonesian Stock Exchange from January 2005 to December 2014. The results reveal that the interest rate, inflation rate, and exchange rate simultaneously show a significant influence on sectoral indices in Indonesia. The interest rate partially has a significant negative effect on all sectors except basic industry and