Abstract
This paper examines the volatility of some of Indonesian macroeconomic indicators, namely the Bank Indonesia rate, inflation, and exchange rates. It is argued that after the financial crisis the variability of these variables increases and this makes it more difficult to predict them. The estimated ARCH parameters increases overtime, indicating higher contribution of shock over several periods. From the random walk, historical mean, moving average and simple regression, it was found that the quality of prediction after the crisis decreases. Financial manager and other policy makers may adjust their strategy to account for this increase in variability.
Highlights
Financial time series, such as stock prices, exchange rates, and inflation rates often exhibit the phenomenon of volatility clustering, that is, periods in which their prices show wide swings for an extended time period followed by periods in which there is relative calm
In general there are two methods used in this study: (1) the predictability of the macro-indicators by using the random walk, historical mean, moving average, and simple regression, and (2) the estimation using GARCH
The predictability analysis was based on the matrix comparing the actual and the predicted, while the GARCH was used to indicate the ease of estimating the variables
Summary
Financial time series, such as stock prices, exchange rates, and inflation rates often exhibit the phenomenon of volatility clustering, that is, periods in which their prices show wide swings for an extended time period followed by periods in which there is relative calm. Financial planners may benefit from understanding the volatility of inflation (prices) in exercising financial plans, whereas importers, exporters, and traders in foreign exchange markets may be affected by the variability in the exchange rates as that might mean huge losses or profits. With the 2008 financial crises being the latest, the world has experienced crises in response to increase in oil prices (1974, 1978, 1984, and 2007–2008), and financial crises in 1998 and 2008. Such increase in oil prices raises the question if the macro-economic indicators have been more volatile recently. Accurate information on the macro-economic behaviour can be beneficial to both fund managers and policy makers
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