The stock market and economic growth nexus in Indonesia

This research investigates the stock market and economic growth relationship in Indonesia during the period of first quarter of 2003 to the second quarter of 2021. Rather than only test the secondary market variable, akin to a large body of similar research, this study tests both the primary and secondary market of the stock market to economic growth. By employing Vector Autoregressive (VAR) model and Granger causality, it is indicated that there is a one-way relationship running from growth to primary market, supporting the demand-following hypothesis. Meanwhile, the secondary market variable, constructed from three variables using principal component analysis, indicated to have a two-way bidirectional relationship with growth, supporting the feedback hypothesis. The results put the importance on growth, and the suggestion is for the policy makers in Indonesia to emphasize real economy activities rather than the stock market itself.