| This dissertation investigates three inter-related issues in Indonesian Capital Markets. The first issue is to examine the dynamic linkages and information transmission of stock prices and macroeconomic variables using the cointegration analysis and the innovation accounting of vector autoregression (VAR). The second issue is to study the timing and significance of monetary variables affecting stock returns in Indonesia using the Kalman Filter. The third issue is to examine the dynamic linkages between Indonesian Capital Markets and other international capital markets by employing the cointegration analysis.;Indonesian Capital Markets are cointegrated with macrovariables. The results show that Indonesian Capital Markets are significantly influenced by interest rate movements. This characteristic is shared with developed countries. However, the effect of interest rates in Indonesia Capital Markets seems to be very pronounced. Realized inflation does not have a significant effect on stock price movements in Indonesia but expected inflation does have a significant effect. The findings agree with the null hypotheses in this study and the empirical evidence in developed countries.;In the dynamic environment, permanent and transitory parts of money aggregates (M2) significantly influence the systematic risk of Indonesian stock returns at a given time. This evidence disagrees with the null hypothesis and seems to be different with the majority evidence found in the developed countries. This particular result may be explained by the balanced budget and a free-exchange rate control pursued by the government of Indonesia. Money aggregates are widely used influence the economy. However, interest rates influence stock returns more significantly than those components of M2 do.;Indonesian Capital Markets are weakly cointegrated with other ASEAN Capital Markets. This result reveals that a social, political and economy cooperation in ASEAN does not guarantee a cointegrated capital market among the country members. The result implies that the benefits of portfolio diversification within ASEAN Capital Markets may be overstated. |
