Domestic Macroeconomic Fundamentals and External Financial Conditions Affecting the Indonesian Stock Market: An ARDL approach

Abstract

The aim of this research is to evaluate the relative impact of domestic macroeconomic stability and external financial shocks in shaping the Indonesian stock market, providing critical insights into market resilience over nearly two decades of recurring global volatility. Using quarterly data from 2006Q1 to 2025Q4, this paper employs an autoregressive distributed lag (ARDL) bound test framework and an error correction model (ECM) to assess both the short-run dynamics and long-run equilibrium relationship between the log of the Indonesian Stock Market and six explanatory variables such as GDP growth, exchange rate, foreign portfolio investment, inflation, interest rate, and global financial market volatility (VIX). The bounds testing procedure confirms the presence of a long-run cointegrating relationship among the variables, indicating that the Indonesian equity market is jointly anchored by domestic macroeconomic conditions and external risk factors. The long-run estimates show that inflation and global financial market volatility exert significant negative effects on the Indonesian stock market, while GDP growth, exchange rate movements, foreign portfolio investment, and interest rates do not display statistically significant long-run effects. In the short run, exchange rate changes, GDP growth, foreign portfolio investment, and changes in the VIX are important drivers of Indonesia's equity market movements. The error correction term is negative and statistically significant, suggesting that approximately 13% of short-run disequilibrium is corrected each quarter. These findings underscore the necessity for a synchronized policy framework that balances price stability with proactive capital-flow surveillance to mitigate external shocks. Ultimately, the study highlights that in an increasingly integrated global market, emerging market resilience depends as much on managing global risk sentiment as it does on domestic economic health.