Analysis of the Influence of Macroeconomic Variables on the Movement of the Composite Stock Price Index using Nonlinear Autoregressive Distributed Lag

Michelle Amanda Godwinn; Ida Fithriani; Siti Nurrohmah

Authors

Michelle Amanda Godwinn University of Indonesia
Ida Fithriani University of Indonesia
Siti Nurrohmah University of Indonesia

Keywords:

Asymmetric Relationship, Long-Run Relationship, Nonlinear Model, Stock Market

Abstract

The stock market is one of the key indicators reflecting a country’s economic conditions. In Indonesia, the Composite Stock Price Index (CSPI) serves as a primary benchmark of domestic stock market performance. Movements in the CSPI are influenced by various macroeconomic variables, including real sector activity as represented by the Industrial Production Index (IPI) and the interest rate. Previous studies suggest that the relationship between the CSPI and macroeconomic variables is not always linear, but may exhibit asymmetric behavior in both the short run and the long run. In this context, asymmetry refers to differences in the effects of positive and negative changes in macroeconomic variables on the CSPI. To capture such nonlinear relationships, this study employs the Nonlinear Autoregressive Distributed Lag (NARDL) approach. The optimal lag selection based on the Akaike’s Information Criterion (AIC) identifies NARDL(12,12,11) as the preferred model specification. The estimation results indicate that the CSPI has a long-run relationship with both the IPI and the interest rate, as evidenced by the bound cointegration test. Furthermore, the relationship among these variables is asymmetric. Increases and decreases in the IPI have different effects on the CSPI, with strong evidence of long-run asymmetry, while short-run asymmetry remains present but weaker. Dynamically, declines in the IPI tend to trigger stronger and more volatile responses in the CSPI compared to increases in the IPI, whose effects generally materialize with a time lag. In contrast to the IPI, the interest rate does not exhibit long-run asymmetry. However, significant short-run asymmetry is observed. Decreases in the interest rate have a positive and significant effect on the CSPI after several periods, whereas increases in the interest rate do not show a significant short-run impact. Overall, decreases in industrial activity and decreases in the interest rate have a stronger effect on the CSPI than increases in these variables. This shows that the CSPI responds differently to positive and negative changes in both industrial activity and interest rates.

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