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average level of price for all goods and services . and we can be defined it as a permanent increase in the aggregate price level which implies a
diminishing of the purchasing power and increase the cost of living. It is important to note from this definition that the movement in the price level
needs to be permanent to believe it as inflation. Inflation considered one of the economic phenomena that still polarized attention of both development
and developing countries. Some differences of relationship among inflation and stock return
are found in several researches. In 2009, consumer price index had negative relationship to stock price in Pakistan stock market. In the next
two years, consumer price index also had negative relationship to Islamic stock market in Malaysian stock market Hussin, Muhammad, Abu,
Awang, 2012. In addition, inflation had positive relationship to stock returns of 10 companies listed in Jakarta Islamic Index Panatagama,
2013.
2.1.10 Money Supply
Money supply is the total amount of money that circulate in society at specific time. There are several standard measures of the money supply,
including monetary base, M1, M2 and M3. The monetary base is defined as the sum of currency in circulation and reserve balances. M1 is defined as
WKH VXP RI FXUUHQF\ SOXV GHPDQG GHSRVLWV WUDYHOHU¶V FKHFNV DQG RWKHU checkable deposits. M2 is defined as the sum of M1 plus money market
mutual fund balances, saving deposits and small time deposits. M3 is defined as M2 plus large time deposits, repurchase agreements, Eurodollars
and institution-only money market mutual fund balances Mankiw, 2006.
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According to Humpe Macmillan 2007, money supply influence stock market in three mechanisms: First, changes in the money supply may
be related to unanticipated increases in inflation and future inflation uncertainty and hence negatively related to the stock market; Second,
changes in the money supply may positively influence the stock market through its impact on economic activity; Finally, portfolio theory suggests
a positive relationship, since it relates an increase in the money supply to a portfolio shift from non-interest bearing money to financial assets
including equities. Friedman and Schwartz in Vejzagic M 2013 examined the link
between money supply and stock returns by their hypothesized that money supply would cause the aggregate economy and the expected stock returns.
An increase in M2 growth would indicate excess liquidity for buying stocks, so that it increasing the stock prices.
2.1.11Interest Rate
Interest rate Interest Rate is a rate which is charged or paid for the use of money. It is often expressed as an annual percentage of the
principal. It is calculated by dividing the amount of interest by the amount of principal. Interest rates often change as a result of inflation and Federal
Reserve policies. This can play a vital factor in deciding the amount of savings as opposed to borrowing. If interest rate is low, people will reduce
savings in banks and invest more money in the market indexes, therefore it is presumed that interest this may play an important role.
According to Panatagama 2013, BI rate has negative significantly effect to the Jakarta Islamic Index JII. It is inline with the research from
Vejzagic and Zarafat 2013 which found that interest rate has negative relationship with Islamic stock market in Malaysia.
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2.2 Previous Studies
Study about stock returns had done many times by economist previously. There are plenty of domestic and international researches on
stock returns. Each research comes with different analysis tools and results. Here are some researches on stock returns in several countries such as M.
6\DILL QWRQLR ++ RQ ³7KH ,VODPLF DSLWDO 0DUNHW 9RODWLOLW\´ which use VARVECM model. The result shows that in the long-term, all
selected macroeconomic variables except Dow Jones Index variable have significantly affect in both Islamic stock market FHSI and JII. While in the
short-term there is no any selected macroeconomic variables that significantly affect FHSI and only inflation, exchange rate and crude oil
price variables seem to significantly affect JII. Research from
3DQDWDJDPD 0 RQ ³7KH QDO\VLV RI Macroeconomic Variables that Influence Stock Returns Jakarta Islamic
,QGH[DQG,WV95RUHFDVWLQJ´XVH95PRGHOThe result of this study indicates negative influence of Bank Indonesia interest rate and Brent
international oil price towards stock returns of 10 companies listed in JII. In addition costumer price index had positive influence to stock returns of
10 companies listed in JII. Meanwhile, trading volume had no causal relationship with stock returns; therefore, it cannot be involved in the
Vector Autoregressive model. According to the research from Sohail, N., Husain, Z. 2009 on
³Long-Run and Short-Run Relationship Between Macroeconomic Variables and Stock Price in Pakistan
´ XVH 90 PRGHO 7KH UHVXOWs revealed that there was a negative impact of consumer price index on stock
returns, while, industrial production index, real effective exchange rate,
