Modeling the returns volatility of Indonesian stock indices: The case of SRI-KEHATI and LQ45

The purpose of this research is to model the volatility of Stock Indices in Indonesian capital market. This research focuses on two stock indices namely SRI-KEHATI and LQ45. SRI_KEHATI is a stock index that consists of companies whose operations are sustainable and environmentally friendly. This stock index is also known as “green index†due to its environment and sustainability concern. This is the novelty of this research that fills in the gap in the literature in which not much known regarding this green index. As the comparison, LQ45 stock index was modeled. The data used in this model were daily returns data of both index. The research period extended from 2 January 2019 to 1 November 2021. The research employed four models i.e. ARCH (1), ARCH (2), GARCH (1,1) and GJR-GARCH (1,1) for both indices returns. The ARCH and GARCH model were employed to capture the conditional variance of the indices return, while GJR-GARCH was specifically chosen to investigate whether there exists asymmetric effect in which return reacts more to bad news than good news. Akaike Information Criterion (AIC) and Schwarz Information Criterion (SIC) were chosen as the parameters for choosing the best models. Data analysis showed that GJR-GARCH was the best model for modeling the returns volatility of SRI-KEHATI and LQ45. This model was able to capture the essential property of asymmetric effect present in both models. The second best model was ARCH (2). Apparently, returns variance of Indonesian stock indices are affected more by lagged residuals. The limitation of this research lies in its research period that covered both pre-pandemic and post-pandemic period. Stock market behavior might be very different between these two periods. Future research may endeavor to investigate how the volatility of stock differs between pre-pandemic and post-pandemic period