Abstract
The study was aimed to investigate the long-run association of oil prices with the stock market index of Indonesia. The research consisted of crude oil prices as regressor, stock market index as regressand, GDP growth and inflation as control variables; and for these variables data were collected from 1990 to 2018. Meanwhile, for empirical investigation, ARDL and Granger Causality was applied to identify the long-run and short-run association of the oil crude oil prices with the stock market index in Indonesia. The findings of the study suggest that there is no long-run and short-run association of the crude oil prices with the stock index of Indonesia. However, a bi-directional association between the stock market and GDP growth but at 10%, the empirical study also suggested that GDP growth has unidirectional relation with inflation at 10%; whereas at 5% only stock market granger cause economic growth.
Highlights
Stock market’s positive growth reflects a sound financial market of a country, it is considered as measuring to tool or barometer to analyse the economic growth of the country (Onour, 2012)
A bi-directional association between the stock market and GDP growth but at 10%, the empirical study suggested that GDP growth has unidirectional relation with inflation at 10%; whereas at 5% only stock market granger cause economic growth
The data is inspected for the existence of unit root via the Augmented Dickey-Fuller test, descriptive statistics is applied to study the variables, the correlation among variables is studied via Granger Causality test, and Autoregressive Distributed Lag (ARDL) model is used to determine the impact of oil prices on stock prices in Indonesia
Summary
Stock market’s positive growth reflects a sound financial market of a country, it is considered as measuring to tool or barometer to analyse the economic growth of the country (Onour, 2012) In this concern, the stock market’s overall performance plays a imperative role in attracting the numerous investors toward the stock prices including both local and foreign investors. The stock market’s overall performance plays a imperative role in attracting the numerous investors toward the stock prices including both local and foreign investors In this regard, the study assembled by Akoum et al (2012) asserted that stock market can be considered as the imperative institution of the country that contributes in harbouring the financial development in the state by fostering productivity, risk sharing, capital accumulation, and by promoting good corporate governance system. Chittedi (2012) asserted that prices of crude oil play a central role in bringing the instability and variations in the economic growth of the country and it possesses the potential to cause the adverse effect on the share prices in stock markets
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