Abstract
This research aims to analyze the cointegration and causality relationship among selected stock market indexes in the world and Indonesia Stock Exchange Composite Index (IHSG) for the period 2005 until 2017. The stock market indexes are selected based on the trading relationship between Indonesia and other countries in the non-oil and gas sectors. The selected stock market indexes are Dow Jones Industries Average, Bombay Stock Exchange Sensex, Kuala Lumpur Stock Exchange, Nikkei, Korea Stock Exchange, Stock Exchange of Thailand, Shanghai Composite, Straits Times Index, and Indonesia Stock Exchange Composite Index (IHSG). This research is a time series research which uses monthly data from January 2005 until December 2017 and Augmented Dickey-Fuller Test, Lag Optimum, Johansen Cointegration Test, Granger Causality Test, Vector Error Correction Model (VECM), Variance Decomposition, and Impulse Response Function. The results of the research show that there is cointegration among selected stock market indexes and Indonesia Stock Exchange Composite Index (IHSG) and there is causality among selected stock market indexes and Indonesia Stock Exchange Composite Index (IHSG).
Highlights
The integration of global finance triggers investors to invest out of their country for the sake of their portfolio’s diversification
The research continues with Johansen Cointegration Test, Granger Causality Test, and Vector Error Correction Model which result shown in the table
Negative cointegrated relationships between Indonesia and US, India, Malaysia, South Korea, and Thailand are suspected because those countries have a big influence on global economy
Summary
The integration of global finance triggers investors to invest out of their country for the sake of their portfolio’s diversification. The kind of relationship that can happen on finance integration with the capital market is an investment in foreign companies by the investors. The amount of investment in a country can be seen through the country’s stock index. Increase in trade, decrease in legal control, and the advancement of the world’s technology make investors interested in investing. Those things make investing more attractive to investors (Srivastava et al, 2015). Along with the advancement of the world’s trade, there are negative influences
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