Business-Specific Risks and Stock Market Volatility as Indonesian Macroeconomic Risk Estimators

Ezra Valentino Purba and Zaäfri Ananto Husodo

A chapter in Macroeconomic Risk and Growth in the Southeast Asian Countries: Insight from Indonesia, 2023, vol. 33A, pp 1-17 from Emerald Group Publishing Limited

Abstract: This study aimed to know the effect of cross-sectional risk, which comprises business-specific risk and stock market volatility, as a variable for estimating macroeconomic risk in Indonesia. This study observes public companies in Indonesia and Indonesian macroeconomic data from 2004 to 2020. In this study, the author uses term spread as the dependent variable that reflects macroeconomic risk. The cross-sectional risk comprises financial friction (FF), cash flow (CF), debt–service ratio, and stock market volatility as independent variables. By using the Autoregressive Distributed Lag (ARDL) Model method, this study shows that business-specific and stock market risk can estimate macroeconomic risk, so that it becomes an early signal of economic shock, such as recession or high inflation, in the future. The model in this study also examines the cross-sectional risk relationship with other macroeconomic indicators, such as the Consumer Confidence Index (CCI), money supply (M0), and Indonesia’s trade balance (TB).

Keywords: Macroeconomic risk; business risk; volatility; financial friction; Indonesian stock market; cross-sectional risk; E0; G1; G32 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eme:isetez:s1571-03862023000033a001

DOI: 10.1108/S1571-03862023000033A001

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