PREDICTORS OF EXCHANGE RATE RETURNS: EVIDENCE FROM INDONESIA

  • Bayu Arie Fianto Department of Islamic Economics, Faculty of Economics and Business, Universitas Airlangga,
  • Nisful Laila Department of Islamic Economics, Faculty of Economics and Business, Universitas Airlangga,
  • Raditya Sukmana Department of Islamic Economics, Faculty of Economics and Business, Universitas Airlangga,
  • Muhammad Madyan Department of Management, Faculty of Economics and Business, Universitas Airlangga,
Keywords: Exchange rate, Predictors, Inflation, External factors, Indonesia

Abstract

Using historical time-series data, we investigate Indonesia’s exchange rate return predictability. We employ nine predictors, namely stock price, gold price, oil price, commodity price, inflation, balance of payment, total exports, the US T-bill rate, and the US federal fund rate. With historical data, we fail to discover any evidence that these factors predict Indonesia’s exchange rate returns. However, we find that oil price, commodity price, inflation, and the US T-bill rate can significantly predict Indonesia’s exchange rate returns during the Asian financial crisis. Our findings key implication is that it is the external factors that dominate the evolution of Indonesia’s exchange rate, and inflation rate is the only domestic factor for policy makers to control.

Downloads

Download data is not yet available.

References

Alba, J.D., Park, D., and Xie, T. (2015). Predictability of Exchange Rates with Tylor Rule Fundamentals: Evidence from Inflation-Targeting Emerging Countries. Emerging Markets Finance and Trade 51, 714-728.

An, L., Kim, Y., You, Y. (2016). Floating Exchange Rates and Macroeconomic Independence. International Review of Economics and Finance, 42, 23-35.

Chen, Y.-C., & Rogoff, K. (2003). Commodity Currencies. Journal of International Economics, 60, 133-160.

Chen, Y. C., Rogoff, K., & Rossi, B. (2010). Can Exchange Rates Forecast Commodity Prices? Quarterly Journal of Economics, 125, 1145–1194.

Choi, J. J., & Papaioannou, M. G. (2009). The US versus Asian Financial Crisis. Credit, Currency or Derivatives: Instruments of Global Financial Stability or Crisis? 10.

Collard, F., Dellas, H. (2002). Exchange Rate Systems and Macroeconomic Stability. Journal of Monetary Economics, 49, 571-599.

Devpura, N., Narayan, P. K., & Sharma, S. S. (2018). Is Stock Return Predictability Time-Varying? Journal of International Financial Markets, Institutions and Money, 52, 152-172.

Devpura, N., Narayan, P. K., & Sharma, S. S. (2019). Structural Instability And Predictability. Journal of International Financial Markets, Institutions and Money, 63, 101145.

Devpura, N., and Narayan, P.K. (2020). Hourly Oil Price Volatility: The Role of COVID-19. Energy Research Letters, 1(2), 13683. https://doi.org/10.46557/001c.13683

Eslamloueyan, K., Kia, A. (2015). Determinants of the Real Exchange Rate in Oil-Producing Countries of the Middle East and North Africa: A Panel Data Investigation. Emerging Markets Finance and Trade 51, 842-855.

Gil-Alana, L. A., & Monge, M. (2020). Crude Oil Prices and COVID-19: Persistence of the Shock. Energy Research Letters, 1, 13200. https://doi.org/10.46557/001c.13200

He, P., Sun, Y., Zhang, Y., and Li, T. (2020). COVID-19’s Impact On Stock Prices Across Different Sectors—an Event Study Based on the Chinese Stock Market. Emerging Markets Finance and Trade; https://doi.org/10.1080/154049

X.2020.1785865.

He, P., Niu, H., Sun, Z., and Li, T. (2020). Accounting Index of COVID-19 Impact on Chinese Industries: A Case Study Using Big Data Portrait Analysis. Emerging Markets Finance and Trade; https://doi.org/10.1080/1540496X.2020.1785866

Haroon, O., Rizvi, S.A.R. (2020). COVID-19: Media Coverage and Financial Markets Behavior—A Sectoral Inquiry. Journal of Behavioral and Experimental Finance, 100343.

Huang, W., and Zheng, Y. (2020). COVID-19: Structural Changes in the Relationship Between Investor Sentiment And Crude Oil Futures Price. Energy Research Letters, 1(2), 13685. https://doi.org/10.46557/001c.13685.

Iyke, B.N. (2020a). The Disease Outbreak Channel of Exchange Rate Return Predictability: Evidence from COVID-19. Emerging Markets Finance and Trade. https://doi.org/10.1080/1540496X.2020.1784718.

Iyke, B. (2020b). COVID-19: The Reaction of US Oil and Gas Producers to the Pandemic. Energy Research Letters, 1(2), 13912. https://doi.org/10.46557/001c.13912.

Jakab, Z.M., Kovacs., M. A. (2000). Determinants of Real Exchange Rate Fluctuations in Hungary. Emerging Markets Finance and Trade, 36, 64-94.

Juhro, S.M., and Phan, D.H.B. (2018). Can Economic Policy Uncertainty Predict Exchange Rate and Its Volatility? Evidence from ASEAN Countries. Bulletin of Monetary Economics and Banking 21, 251-268.

Liu, L., Wang, E. Z., & Lee, C. C. (2020). Impact of the COVID-19 Pandemic on The Crude Oil And Stock Markets in the US: A Time-Varying Analysis. Energy Research Letters, 1, 13154. https://doi.org/10.46557/001c.13154

Molodtsova, T., Nikolsko-Rzhevskyy, A., & Papell, D.H. (2011). Taylor Rules and the Euro. Journal of Money, Credit and Banking, 43, 535–552.

Narayan, P.K., Sharma, S.S., Phan, D., Liu, G. (2020). Predicting Exchange Rate Returns. Emerging Markets Review 41, 1-16.

Narayan, P. (2019). Understanding Indonesia’s City-Level Consumer Price Formation: Implications for Price Stability. Bulletin of Monetary Economics and Banking 22, 405 - 422.

Narayan, P. K. (2020). Oil price news and COVID-19—Is there any connection? Energy Research Letters, 1, 13176. https://doi.org/10.46557/001c.13176.

Narayan, P. K., Narayan, S., Khademalomoom, S., & Phan, D. H. B. (2018). Do Terrorist Attacks Impact Exchange Rate Behavior? New International Evidence. Economic Inquiry, 56, 547-561.

Narayan, P. K., Ahmed, H. A., Sharma, S. S., & Prabheesh, K. (2014a). How Profitable Is the Indian Stock Market? Pacific-Basin Finance Journal, 30, 44-61.

Narayan, P. K., Narayan, S., & Thuraisamy, K. S. (2014b). Can Institutions and Macroeconomic Factors Predict Stock Returns in Emerging Markets? Emerging Markets Review, 19, 77-95.

Narayan, P. K., Sharma, S. S., & Bannigidadmath, D. (2013). Does Tourism Predict Macroeconomic Performance in Pacific Island Countries? Economic Modelling, 33, 780-786.

Phan, D.H.B., and Narayan, P.K. (2020). Country Responses and the Reaction of the Stock Market to COVID-19—A Preliminary Exposition. Emerging Markets Finance and Trade; https://doi.org/10.1080/1540496X.2020.1784719

Prabheesh, K.P., Padhan, R., and Garg, B. (2020). COVID-19 and the Oil Price— Stock Market Nexus: Evidence from Net Oil-Importing Countries. Energy Research Letters, 1(2), 13745. https://doi.org/10.46557/001c.13745.

Qin, M., Zhang, Y. C., & Su, C. W. (2020). The Essential Role of Pandemics: A Fresh Insight into the Oil Market. Energy Research Letters, 1, 13166. https://doi.org/10.46557/001c.13166.

Rossi, B., & Inoue, A. (2012). Out-of-Sample Forecast Tests Robust to the Choice of Window Size. Journal of Business & Economic Statistics, 30, 432–453.

Sharma, S. S. (2019). Which Variables Predict Indonesia’s Inflation? Bulletin of Monetary Economics and Banking, 22, 87-102.

Sharma, S. S. (2016). Can Consumer Price Index Predict Gold Price Returns? Economic Modelling, 55, 269-278.

The World Bank. (2018). Indonesia Overview. Retrieved October, 28, 2018,from http://www.worldbank.org/en/country/indonesia/overview.

Trading Economics. (2018). Indonesia Stock Market. Retrieved October, 10, 2018.

Westerlund, J., & Narayan, P. K. (2012). Does the Choice of Estimator Matter When Forecasting Returns? Journal of Banking & Finance, 36, 2632-2640.

Westerlund, J., & Narayan, P. K. (2015). Testing for Predictability in Conditionally heteroskedastic stock returns. Journal of Financial Econometrics, 13, 342-375.

Published
2020-09-10
How to Cite
Fianto, B., Laila, N., Sukmana, R., & Madyan, M. (2020). PREDICTORS OF EXCHANGE RATE RETURNS: EVIDENCE FROM INDONESIA. Buletin Ekonomi Moneter Dan Perbankan, 23(2), 239 - 252. https://doi.org/10.21098/bemp.v23i1.1169
Section
Articles