Dynamic Analysis of the Stock Price Index and the Exchange Rate Using Vector Autoregression (VAR): An Empirical Study of the Jakarta Stock Exchange, 2001-2004

This research examines whether there is a causal relationship between the Rupiah exchange rate and the composite stock price index. The Vector Autoregressive (VAR) method is applied to analyze daily time series data from January 24th, 2001 to June 18th, 2004. It shows that the series are non-stationary and become stationary on the first difference or I (1). Although they have the same integration order, neither variable is co-integrated based on the Augmented Engle Granger Method and Johansen’s Co-integration Test. Consequently, the modeling technique used in this study (VAR) is applied to the first difference level. From the VAR model, it was found that the Rupiah exchange rate is affected by both the past exchange rate and the stock price index (ceteris paribus). In contrast, the stock price index is only affected by past index movements. These results are supported by innovative accounting calculated by both Variance Decompositions (VDCs) and Impulse Response Function (IRF). We conclude that the index can be a leading indicator for the exchange rate following the Portfolio Balance Approach.