volatility of returns, trading volume and the impact of macroeconomic announcements

152 Pages·2016·3.11 MB·English

VOLATILITY OF RETURNS, TRADING VOLUME AND THE
IMPACT OF MACROECONOMIC ANNOUNCEMENTS:
HIGH-FREQUENCY EVIDENCE FROM THE INDONESIAN STOCK
MARKET

Haryadi
Master of Business (Banking and Finance)

College of Business, Victoria University
Melbourne, Australia

Submitted in fulfilment of the requirements of the degree of
Doctor of Business Administration

November 2016
ABSTRACT
A great amount of research has been undertaken into the patterns of, and the
contributing factors to, the volatility of emerging equity market returns. One of the most
common findings in the research is that the volatility of emerging market returns is high
compared to that of developed markets. One factor contributing to the high volatility of
returns in emerging markets is a lack of informational efficiency in the markets. The
objective of this thesis is to examine the informational efficiency of the Indonesia Stock
Exchange (IDX) by looking at the impact of the arrival of public information on the
volatility of returns and investigating the relationship between trading volume, which is
used as a proxy for the arrival of information, and volatility.
Scheduled U.S. and Indonesian macroeconomic announcements are used as indicators
for the arrival of public information. High-frequency data and an autoregressive
econometric models are employed to examine the extent to which the volatility is
affected by the macroeconomic announcements. Contrary to the literature, this thesis
has found that, while most domestic macroeconomic announcements impact
significantly on the volatility, there is no evidence that the U.S. Federal Open Market
Committee announcements have an impact on volatility. In addition, the 2008 Global
Financial Crisis significantly influenced the impact of macroeconomic news on the
volatility of Indonesian equity market returns.
This study also examines the relationship between market-wide realized volatility and
trading volume of the Indonesian equity market. Trading volume has been used to
indicate the arrival of new information, and its use as a proxy for information can
improve understanding of the IDX’s microstructure. Consistent with the literature, this
thesis reports different patterns of trading volume and returns volatility of the IDX
during intraday trading. Using the Granger-causality test model, the study finds mixed
results on the significance and direction of volume-volatility relationships. There are no
Granger-causality relations between trading volume and volatility of returns of the
Indonesian equity market during the full sample period. However, there is evidence of
bi-directional causality relationships when observations are decomposed into subsample
periods and days of the week.
II
DECLARATION
I, Haryadi, declare that the DBA thesis entitled ‘Volatility of Returns, Trading Volume,
and the Impact of Macroeconomic Announcements: High-frequency Evidence from the
Indonesian Stock Market’ is no more than 65,000 words in length including quotes and
exclusive of tables, figures, appendices, bibliography, references and footnotes. This
thesis contains no material that has been submitted previously, in whole or in part, for
the award of any other academic degree or diploma. Except where otherwise indicated,
this thesis is my own work.

Haryadi
November 8, 2016

III
TABLE OF CONTENTS
ABSTRACT ................................................................................................................ II
DECLARATION ........................................................................................................ III
TABLE OF CONTENTS ............................................................................................ IV
LIST OF FIGURES ................................................................................................. VIII
LIST OF TABLES ...................................................................................................... IX
ABBREVATIONS ....................................................................................................... X
ACKNOWLEDGEMENTS ....................................................................................... XII
CHAPTER 1 ................................................................................................................. 1
INTRODUCTION ........................................................................................................ 1
1.1 Background and motivation ................................................................................. 1
1.2 Research aims and questions ............................................................................... 4
1.3 Conceptual framework ......................................................................................... 5
1.4 Contribution to knowledge ................................................................................... 6
1.5 Statement of significance (practical contribution) ................................................ 6
1.6 Structure of the thesis .......................................................................................... 7
CHAPTER 2 ................................................................................................................. 9
THE INDONESIAN CAPITAL MARKET: AN OVERVIEW ...................................... 9
2.1 Introduction ......................................................................................................... 9
2.2 The Indonesian stock market: History and development ....................................... 9
2.2.1 Deregulation of Indonesian financial sector ................................................. 11
2.2.2 Indonesian stock market and two financial crises......................................... 14
2.3 Macroeconomic policy and financial markets stability ....................................... 18
2.3.1 Indonesian key macroeconomic indicators .................................................. 18
2.3.2 Indonesian macroeconomic policy ............................................................... 20
2.4 The structure of Indonesian financial markets .................................................... 21
2.4.1 The Indonesian stock market microstructure ................................................ 23
IV
2.4.2 The Indonesian stock market’s performance: Key statistics ......................... 27
2.5 Conclusion ........................................................................................................ 30
CHAPTER 3 ............................................................................................................... 31
VOLATILITY OF RETURNS, TRADING VOLUME AND THE IMPACT OF
MACROECONOMIC ANNOUNCEMENTS: A REVIEW OF THE LITERATURE . 31
3.1 Introduction ....................................................................................................... 31
3.2 The volatility of returns: Theory and evidence ................................................... 31
3.2.1 Definition of volatility ................................................................................. 32
3.2.2 The importance of volatility ........................................................................ 33
3.2.3 The volatility of emerging stock market returns ........................................... 34
3.3 High-frequency data and intraday volatility of returns ....................................... 38
3.3.1 High-frequency data in finance studies ........................................................ 38
3.3.2 Types of volatility estimation ...................................................................... 39
3.3.3 Patterns of intraday volatility of returns ....................................................... 41
3.3.4 Intraday volatility and market microstructure noise ..................................... 43
3.4 Macroeconomic announcements, volatility of returns, and trading volume ........ 44
3.4.1 Theory of efficient markets ......................................................................... 44
3.4.2 Theory of market microstructure ................................................................. 46
3.5 The Global Financial Crisis and macroeconomic policy initiatives .................... 51
3.6 The gap in the literature .................................................................................... 53
3.7 Conclusion ........................................................................................................ 53
CHAPTER 4 ............................................................................................................... 55
DATA AND VARIABLES ......................................................................................... 55
4.1 Introduction ....................................................................................................... 55
4.2 Data and sample ................................................................................................ 55
4.2.1 Types and sources of data ............................................................................ 55
4.2.2 Sample period, asset prices and sampling frequency .................................... 56
4.3 Definition and measurement of variables ........................................................... 59
4.3.1 Intraday returns of LQ 45 index .................................................................. 59
4.3.2 Volatility of LQ45 index returns.................................................................. 60
V
4.3.3 Trading volume ........................................................................................... 64
4.4 Data of scheduled macroeconomic announcements ............................................ 67
4.4.1 The U.S. macroeconomic announcements ................................................... 67
4.4.2 Indonesian macroeconomic announcements ................................................ 69
4.4.3 The surprise component of scheduled macroeconomic announcements ....... 71
4.4.4 The time stamps of Indonesian macroeconomic announcements .................. 72
4.5 Conclusion ........................................................................................................ 74
CHAPTER 5 ............................................................................................................... 75
VOLATILITY OF RETURNS AND THE IMPACT OF MACROECONOMIC
ANNOUNCEMENTS ................................................................................................. 75
5.1 Introduction ....................................................................................................... 75
5.2 The volatility of returns...................................................................................... 75
5.2.1 Descriptive statistics .................................................................................... 75
5.2.2 The time-series patterns of LQ45 price, returns and volatility ...................... 77
5.2.3 The intraday patterns of volatility of returns ................................................ 78
5.3 The impact of macroeconomic announcements on volatility ............................... 81
5.3.1 Methodology ............................................................................................... 81
5.3.2 Empirical findings ....................................................................................... 83
5.3.2.1 The stationarity and autocorrelation tests of the volatility series ............... 83
5.3.2.2 The impact of macroeconomic announcements and news ......................... 84
5.3.2.3 The impacts of the 2008 Global Financial Crisis ....................................... 90
5.4 Conclusion ........................................................................................................ 93
CHAPTER 6 ............................................................................................................... 94
TRADING VOLUME AND THE VOLATILITY OF RETURNS .............................. 94
6.1 Introduction ....................................................................................................... 94
6.2 Trading volume and volatility of returns relations ............................................. 94
6.2.1 Descriptive statistics .................................................................................... 94
6.2.2 The intraday patterns of trading volume and volatility ................................. 96
6.2.3 Correlation test of trading volume and volatility ........................................ 101
VI
6.3 The relationships between trading volume and volatility: Models and empirical
findings ................................................................................................................. 102
6.3.1 Contemporaneous relationships between trading volume and volatility ..... 102
6.3.2 Causal relationships between trading volume and realized volatility .......... 104
6.4 Conclusion ...................................................................................................... 110
CHAPTER 7 ............................................................................................................. 112
CONCLUSION ........................................................................................................ 112
7.1 Introduction ..................................................................................................... 112
7.2 Summary of results and discussion................................................................... 113
7.3 Implications and recommendation ................................................................... 114
7.4 Limitations ...................................................................................................... 117
7.5 Suggestions for further research ...................................................................... 117
APPENDICES .......................................................................................................... 119
REFERENCES ......................................................................................................... 122

VII
LIST OF FIGURES
Figure 1.1 Conceptual framework ................................................................................. 5
Figure 2.1 Total stocks, bonds, rights and investment funds from 1977 to 1995 .......... 13
Figure 2.2 The number of securities and funds issuance before and after the 1998 crisis
................................................................................................................................... 16
Figure 2.3 Bank Indonesia’s policy transmission mechanism ...................................... 20
Figure 2.4 The Indonesia Stock Exchange: Trading mechanism .................................. 26
Figure 2.5 The Indonesian Stock Composite Index and Capital Market Milestones ..... 28
Figure 4.1 Thirty minute rolling window volatility ...................................................... 64
Figure 5.1 Time-series of the LQ45 price, returns and volatility, 2006 to 2012 ............ 78
Figure 5.2 The patterns of Intraday volatility full sample and subsample periods ........ 79
Figure 5.3 The patterns of intraday volatility by months of the year: ........................... 80
Figure 5.4 The patterns of intraday volatility by days of the week: Before, during, and
after the GFC .............................................................................................................. 81
Figure 6.1 Intraday patterns of 30 minute window trading volume and volatility ......... 97
Figure 6.2 Intraday patterns of 30 minute window trading volume and volatility by
subsample periods ....................................................................................................... 98
Figure 6.3 Intraday patterns of 30 minute window trading volume and volatility by
months of the year....................................................................................................... 99
Figure 6.4 Intraday patterns of 30 minute window trading volume and volatility by days
of the week ............................................................................................................... 100

VIII
LIST OF TABLES
Table 2.1 The growth of demand deposits and the number of bank offices .................. 12
Table 2.2 Components of Indonesian GDP Growth 2012–2013 ................................... 19
Table 2.3 The market capitalization of the Indonesia Stock Exchange and the stock
exchanges of selected Asian countries ......................................................................... 22
Table 2.4 Trading hours of the stock exchanges in selected Asian countries ................ 24
Table 2.5 Trading schedule of the Indonesia Stock Exchange ...................................... 25
Table 2.6 Price increments between orders 2006 – 2014 ............................................. 27
Table 2.7 Auto Rejection System Levels ..................................................................... 27
Table 2.8 Key Market Indicators of the Indonesia Stock Exchange 2006 – 2014 ......... 29
Table 4.1 Description of market variables .................................................................. 59
Table 4.2 Number of observations of market variables ................................................ 66
Table 4.3 Scheduled macroeconomic announcements ................................................. 71
Table 4.4 Summary of the U.S. and Indonesian macroeconomic announcements & news
................................................................................................................................... 73
Table 5.1 Descriptive statistics of 30 minute realized volatility of the LQ45 index ...... 76
Table 5.2 Macroeconomic announcements and expected direction .............................. 84
Table 5.3 Regression results of the impact of macroeconomic announcements and news
during the full sample period ....................................................................................... 85
Table 5.4 Regression results of the impact of macroeconomic announcements and news
during the full sample period by days of the week ....................................................... 87
Table 5.5 Regression results of the impact of macroeconomic announcements and
surprises during the full sample and around the GFC periods (Monday to Thursday) .. 92
Table 6.1 Descriptive statistics of trading volume & realized volatility of LQ45 index 95
Table 6.2 Correlation matrix of trading volume and volatility ................................... 101
Table 6.3 Results of the contemporaneous impact of trading volume on volatility ..... 103
Table 6.4 Tests for unit-roots for realized volatility and trading volume .................... 106
Table 6.5 Results of the VAR estimation and Granger-causality test ......................... 108

IX
ABBREVATIONS

ADF Augmented Dickey-Fuller
AFC Asian Financial Crisis
AOI All Ordinary Index
ARC Advanced Release Calendar
ARCH Autoregressive Conditional Heteroscedasticity
ASIC Australian Securities and Investments Commission
ASX Australian Securities Exchange
Bapepam Badan Pengawas Pasar Modal (Indonesian Capital Market Supervisory
Agency)
BapepamLK Badan Pengawas Pasar Modal dan Lembaga Keuangan (Indonesian
Capital Market and Financial Institutions Supervisory Agency)
BEI Bursa Efek Indonesia (Indonesia Stock Exchange)
BI Bank Indonesia
BI Rate Bank Indonesia Target Interest Rate
BPS Badan Pusat Statistik (Statistics Indonesia)
CAR Capital Adequacy Ratio
CBOE Chicago Board Options Exchange
CCI Consumer Confidence Index
CPI Consumer Price Index
C-BEST Central Depository & Book Entry Settlement
EMH Efficient Market Hypothesis
FOMC The Federal Open Market Committee
FKSSK Forum Koordinasi Stabilitas Sistem Keuangan (Financial System
Stability Coordination Forum)
GARCH Generalized Autoregressive Conditional Heteroscedasticity
GDP Gross Domestic Product
GFC Global Financial Crisis
X