| Summary: | This study explores the determinants of macroeconomic variables and
stock prices for the case of Indonesia in a VECM framework. Upon testing a
vector error correction model, we show that changes in Jakarta composite index
do perform a cointegrating relationship with changes in industrial production
index , real exchange rate , money supply, reserves and interest rate.
This shows that the Indonesia stock market is sensitive to changes in the
macroeconomic variables. Furthermore, based on the variance decomposition
analysis, this paper highlights that industrial production index has the strongest
influence to Indonesia stock market as compared to real exchange rate, money
supply, interest rate and reserves.
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