This study examines the relationship between macroeconomic variables
volatility (industrial production, exchange rate, inflation rate and money supply)
and stock market volatility in Indonesia. Monthly data from January 1986 to
December 2013 are employed in this study. Using GARCH (1, 1) and Granger
Causality test, the results show that the macroeconomic variables volatility has
no impact toward the Indonesian stock market volatility. However, there is only
an unidirectional causal relationship running from stock market volatility to
exchange rate volatility. Therefore, policy makers should take into account stock
market volatility in making any policy related to exchange rate.
