Does Stock Market Lead to Economic Growth in Indonesia?

Abstract

The stock market possibly could be a leading indicator for economic growth since it is real-time and changes every day following the psychology of economic actors, while the economic growth data is only officially released quarterly. Therefore, it can be used by economic actors to purposive preventive and mitigation efforts immediately. This study aims to determine whether it exists in the Indonesian context. For that reason, this study applies Vector Auto Regression (VAR) on quarterly the economic growth data and the composite stock price index (ICI) from 2001 to 2021. This study conducts variables and a multivariate causality test to determine the causality relationship. The Granger Causality Test shows that the stock market represented by ICI can be a leading indicator of economic growth. The estimation also finds that when the shock happens on the stock market, it will affect the economic growth for four years.