A Model of the Dynamic of the Relationship between Stock Prices and Economic Growth of Indonesia

Abstract

This study aimed to examine the dynamic of the relationship between stock prices and economic growth in Indonesia over the period from the first quarter 2004 to the fourth quarter 2013. The study analyzed two types of quarterly data, i.e., data about stock prices that referred to stock price index issued by Indonesian Stock Exchange and data of economic growth that referred to the percentage of changes in GDP. To analyze the dynamic of the relationship, the general univariate causal model of LVAR was employed. Findings revealed that there was a significant dynamic of relationship between the two variables under investigation. The relationship was positive, meaning that when stock prices went up (went down), then the economic growth of Indonesia went up (went down) as well. Each 1% increase (decrease) in the stock prices was always followed by 0.09% increase (decrease) in Indonesian economic growth.