Do macroeconomic variables have any impact on stock market? an Indonesian case study based on ARDL approach

This paper makes an attempt to examine the impact of selected macroeconomic variables on the stock market. Indonesia is taken as a case study. This study is a fresh attempt to investigate the relationship among the variables by applying ‘Auto Regressive Distributive Lag’ (ARDL) model which has taken care of a major limitation of the conventional cointegrating tests in that they suffer from pre-test biases between the variables. The data used in this study are monthly data of major macroeconomics variables which are inflation rate, interest rate, exchange rate and stock index. This study provides evidence that by applying ARDL technique, there is a significant cointegrating relationship among variables and that macroeconomic variables seem to significantly impact the stock market of Indonesia. Inflation rate was found to have the strongest impact on stock market compared to other macroeconomic variables. The stock index will be most impacted by inflation rate and interest rate, while exchange rate will be most impacted by inflation rate, interest rate and stock index. The findings have important policy implications for the national policy makers, researchers, corporate managers and regulator