Abstract
The Indonesia Stock Exchange has experienced high growth in its 32 years. The Composite Stock Price Index rose 1.012% in that period, or an average of 31.63% per year. This study analyzes the risk premium on the Indonesia Stock Exchange (IDX) in the last 32 years. In this study, we found the following facts. First, the risk premium at IDX is 2.24% per year if using annual data and 5.54% when using annualized monthly data. It seems that the risk premium in IDX is sensitive to the return calculation horizon used. Second, in the 1997-1998 economic and 2008 financial crises, the risk premium experienced a sharp decline but was followed by a sharp increase in the following months. Third, the macroeconomic variables of inflation and currency exchange rates significantly affect the risk premium, but the interest rate does not. The effect of macroeconomic variables on the risk premium is also sensitive to the horizon of the return calculation used. The results above are when using annual data. The three macroeconomic variables do not affect the risk premium when using monthly data.
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