Causality Analysis between the Foreign Investor Transaction Value and Stock Market Returns (Period 2014-2018)

Tunjung Bayu Murdoko, Sri Isworo Ediningsih, Sri Budiwati Wahyu Suprapti

Abstract


The purpose of this study was to determine the causal relationship between the variable value of foreign investor transactions and stock market returns, given the unclear relationship between the two variables. The model of the study used the VAR (Vector Auotoregressive) model. Granger Causality Test (Granger Causality Test) is conducted to test the cause and effect relationship or causality between variables, in this case the variable has a two-way or only one-way relationship. Furthermore, the impulse response and variance decomposition analysis were carried out. Based on the Granger causality test, it is found that there is a two-way (bidirectional) relationship between the transaction value of foreign investors and stock market returns. Based on the impulse response analysis, it was found that the shock effect of each variable did not result in a long-term effect, while the analysis of the variance decomposition showed that each variable could explain each other if there was a change between the two variables, although the portion of the explanation was still dominated by their respective variables.

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