Abstract
This research proves that the movement of Stock Market Index (JSX) in Indonesia does not follow random walk. Therefore, certain variables in financial market influence the movement of JSX. VECM and ECM testings show that regional index in ASEAN countries and Hongkong as well as exchange rate significantly affect JSX movement. This indicates a strong contagious effect of the stock market in Asia on the Indonesian stock market, which joined the exchange rate effects concurrently. On the other hand, monetary policy through Bank Indonesia rate (BI rate) less strongly affects the movement of JSX, albeit significant. Implicitly, this indicates that monetary policy transmission path through the stock market is still weak. Given the limited authority to intervene other country’s stock market, the policy implication of this study suggests the authorities to maintain exchange rate stability. This especially relates to policies for speculative capital flows. It is the time for the authorities to establish policies to improve the effectiveness and efficiency of financial markets as financial intermediation.
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