THE IMPACT OF EXCHANGE RATE AND INTEREST RATE ON COMPOSITE STOCK PRICE INDEX : COMPARISON BETWEEN INDONESIA AND SINGAPORE 2000-2011.
THE IMPACT OF EXCHANGE RATE AND INTEREST RATE ON COMPOSITE
STOCK PRICE INDEX : COMPARISON BETWEEN INDONESIA AND SINGAPORE
2000-2011
THESIS
This is submitted in partial fulfillment of the requirements for the bachelor degree form
andalas university
By
YOLIT PERMATA SARI
0810514024
Bachelor Degree of economics department
Faculty of economy
Andalas university
Padang
2012
ABSTRACT
This research empirically examines the impact of exchange rate and interest rate on composite
stock price : comparison between Indonesia and Singapore by using annual time series data from 20002011. Vector Auto Regression (VAR) is the method used in this research. The result show that exchange
rate and interest rate respond negatively to I do esia’s composite stock index but in Singapore the
e cha ge rate respo d egativel to the straits ti es’ index and interest rate respond positively to the
straits time index. The finding in this research suggests both interest rate and exchange rate give
dominant effect on composite stock price index in both countries. Governments as policy maker must be
carefully understand with both variables in order that they can control composite stock price index
variables.
Keyword: I do esia’s Co posite Stock Price I dex, Singapore Straits time Index, Exchange Rate and
Interest Rate
LIST OF CONTENTS
Chapter I INTRODUCTION
1.1 Background .................................................................................... 1
1.2 Research Problem ........................................................................... 6
1.3 Research Question .......................................................................... 6
1.4 Research Objective ......................................................................... 7
1.4 Hypothesize .................................................................................... 7
1.5 Research Advantage ....................................................................... 8
1.6 Organization of the Study ............................................................... 8
Chapter II Review of Literature
2.1 Theoretical Review ....................................................................... 20
2.1.1 Composite Stock Price Index ............................................... 9
2.1.2 Exchange Rate ................................................................... 13
2.1.3 Interest Rate ....................................................................... 17
2.2 Literature Review ......................................................................... 19
Chapter III Overview of Economic Condition
3.1 Indonesia’s Stock Price Index ...................................................... 29
3.2 Singapore’s Stock Price Index ..................................................... 33
3.3 Indonesia’s Exchange Rate .......................................................... 39
3.4 Singapore’s Exchange Rate ........................................................... 44
3.5 Indonesia’s Interest Rate .............................................................. 47
3.5 Singapore’s Interest Rate .............................................................. 51
Chapter IV Theoretical Framework and Research Methodology
4.1 Theoretical Framework ................................................................ 52
4.2 Research Methodology ................................................................. 57
4.2.1 Types and Sources of data ................................................. 57
4.2.2 Data Analysis ..................................................................... 57
4.2.3 Model Analysis .................................................................. 57
4.2.4 Methodology ...................................................................... 59
Chapter V Empirical Results and Analysis
5.1 Stationary Test .............................................................................. 63
5.2 Lag Length Selection .................................................................... 64
5.3 Cointegration Test ........................................................................ 66
5.4 Granger Causality Test ................................................................. 67
5.5 VAR/VECM Estimation................................................................ 68
5.6 Impulse Response Function........................................................... 75
5.7 Variance Decomposition . ............................................................. 79
5.8 Analysis Result .............................................................................. 82
Chapter VI Conclusions and Recommendations
6.1 Conclusions .................................................................................. 88
6.2 Recommendations ........................................................................ 90
Reference
Appendix
LIST OF TABLES
5.1 Unit root test for Indonesia .......................................................................64
5.2 Unit root test for Singapore .......................................................................64
5.3 Lag Length Selection for Indonesia ..........................................................65
5.4 Lag Length Selection for Singapore .........................................................66
5.5 Cointegration test for Indonesia ................................................................67
5.6 Cointegration test for Singapore ...............................................................67
5.7 Granger Causality for Indonesia ...............................................................68
5.8 Granger Causality for Singapore ..............................................................69
5.9 VAR Estimation in Indonesia ...................................................................71
5.10 VECM Estimation in Singapore .............................................................73
5.11 Variance Decomposition for Indonesia ...................................................79
5.12 Variance Decomposition for Singapore ...................................................80
LIST OF GRAPH
3.1 Yearly Composite Stock Price Index Position .......................................... .31
3.2 Yearly Strait times Index Position ............................................................. 36
3.3 Yearly Indonesia Exchange Rate Position ................................................. 40
3.4 Yearly Singapore exchange Rate Position ................................................. 45
3.5 Yearly Indonesia Interest Rate Position ..................................................... 48
3.6 Yearly Indonesia Interest Rate Position ..................................................... 51
3.7 Impulse Response Function ....................................................................... 76
STOCK PRICE INDEX : COMPARISON BETWEEN INDONESIA AND SINGAPORE
2000-2011
THESIS
This is submitted in partial fulfillment of the requirements for the bachelor degree form
andalas university
By
YOLIT PERMATA SARI
0810514024
Bachelor Degree of economics department
Faculty of economy
Andalas university
Padang
2012
ABSTRACT
This research empirically examines the impact of exchange rate and interest rate on composite
stock price : comparison between Indonesia and Singapore by using annual time series data from 20002011. Vector Auto Regression (VAR) is the method used in this research. The result show that exchange
rate and interest rate respond negatively to I do esia’s composite stock index but in Singapore the
e cha ge rate respo d egativel to the straits ti es’ index and interest rate respond positively to the
straits time index. The finding in this research suggests both interest rate and exchange rate give
dominant effect on composite stock price index in both countries. Governments as policy maker must be
carefully understand with both variables in order that they can control composite stock price index
variables.
Keyword: I do esia’s Co posite Stock Price I dex, Singapore Straits time Index, Exchange Rate and
Interest Rate
LIST OF CONTENTS
Chapter I INTRODUCTION
1.1 Background .................................................................................... 1
1.2 Research Problem ........................................................................... 6
1.3 Research Question .......................................................................... 6
1.4 Research Objective ......................................................................... 7
1.4 Hypothesize .................................................................................... 7
1.5 Research Advantage ....................................................................... 8
1.6 Organization of the Study ............................................................... 8
Chapter II Review of Literature
2.1 Theoretical Review ....................................................................... 20
2.1.1 Composite Stock Price Index ............................................... 9
2.1.2 Exchange Rate ................................................................... 13
2.1.3 Interest Rate ....................................................................... 17
2.2 Literature Review ......................................................................... 19
Chapter III Overview of Economic Condition
3.1 Indonesia’s Stock Price Index ...................................................... 29
3.2 Singapore’s Stock Price Index ..................................................... 33
3.3 Indonesia’s Exchange Rate .......................................................... 39
3.4 Singapore’s Exchange Rate ........................................................... 44
3.5 Indonesia’s Interest Rate .............................................................. 47
3.5 Singapore’s Interest Rate .............................................................. 51
Chapter IV Theoretical Framework and Research Methodology
4.1 Theoretical Framework ................................................................ 52
4.2 Research Methodology ................................................................. 57
4.2.1 Types and Sources of data ................................................. 57
4.2.2 Data Analysis ..................................................................... 57
4.2.3 Model Analysis .................................................................. 57
4.2.4 Methodology ...................................................................... 59
Chapter V Empirical Results and Analysis
5.1 Stationary Test .............................................................................. 63
5.2 Lag Length Selection .................................................................... 64
5.3 Cointegration Test ........................................................................ 66
5.4 Granger Causality Test ................................................................. 67
5.5 VAR/VECM Estimation................................................................ 68
5.6 Impulse Response Function........................................................... 75
5.7 Variance Decomposition . ............................................................. 79
5.8 Analysis Result .............................................................................. 82
Chapter VI Conclusions and Recommendations
6.1 Conclusions .................................................................................. 88
6.2 Recommendations ........................................................................ 90
Reference
Appendix
LIST OF TABLES
5.1 Unit root test for Indonesia .......................................................................64
5.2 Unit root test for Singapore .......................................................................64
5.3 Lag Length Selection for Indonesia ..........................................................65
5.4 Lag Length Selection for Singapore .........................................................66
5.5 Cointegration test for Indonesia ................................................................67
5.6 Cointegration test for Singapore ...............................................................67
5.7 Granger Causality for Indonesia ...............................................................68
5.8 Granger Causality for Singapore ..............................................................69
5.9 VAR Estimation in Indonesia ...................................................................71
5.10 VECM Estimation in Singapore .............................................................73
5.11 Variance Decomposition for Indonesia ...................................................79
5.12 Variance Decomposition for Singapore ...................................................80
LIST OF GRAPH
3.1 Yearly Composite Stock Price Index Position .......................................... .31
3.2 Yearly Strait times Index Position ............................................................. 36
3.3 Yearly Indonesia Exchange Rate Position ................................................. 40
3.4 Yearly Singapore exchange Rate Position ................................................. 45
3.5 Yearly Indonesia Interest Rate Position ..................................................... 48
3.6 Yearly Indonesia Interest Rate Position ..................................................... 51
3.7 Impulse Response Function ....................................................................... 76