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Economics and Accounting Journal
Vol. 3, No. 1, Jan 2020
ISSN 2615-7888
73
* Corresponding author’s e-mail: bsutrisno.umj@gmail.com
http://openjournal.unpam.ac.id/index.php/EAJ
THE DETERMINANTS OF STOCK PRICE VOLATILITY IN
INDONESIA
Bambang Sutrisno
Universitas Muhammadiyah Jakarta, Tangerang Selatan, Indonesia
bsutrisno.umj@gmail.com
ABSTRACT
Volatility reflects stock price fluctuation in a certain period. The objective of this
research is to examine the effect of trading volume, firm size, inflation, and exchange rate
on stock volatility of the Jakarta Islamic Index companies from 2014 to 2018. By using a
purposive sampling technique, the research sample is sixteen companies. This research
employs panel regression with annual data. This study reveals that the stock trading
volume significantly affects stock price volatility. Firm size is negatively related to price
volatility. Meanwhile, the inflation and exchange rate do not affect stock volatility.
Keywords: stock price volatility; trading volume; firm size; inflation; exchange rate
1. INTRODUCTION
Volatility means the price
fluctuation of security or commodity
for a specified period. Volatility is
identical to risk. The higher the
volatility, the higher the uncertainty
of the return. If the daily volatility is
very high, it gives space to make
trades or transactions to benefit from
the difference from the initial price
with the final price (margin) at the
time of the transaction; however, the
risk is also huge. Meanwhile, stock
price with low volatility means the
stock price movements are shallow.
In this condition, investors usually
cannot get profit, but they must hold
shares in the long run to obtain profit
(capital gain). Therefore, investors
who like to do trading strategies are
very fond of high volatility, but long-
term investors are very fond of low
volatility, but share prices increases
(Chan and Fong, 2000).
Macro and micro factors can
influence high and low stock price
volatility. Macro factors are factors
that affect the overall economy,
including interest rate, exchange rate,
inflation, money supply, oil prices,
and other factors that have an
essential impact on companies. On
the other hand, micro factors are
factors that have a direct impact on
the company itself, such as
management change, price,
availability of raw materials, and
other factors that can affect the profit
performance of individual
companies, including funding.
However, from these factors, it is
difficult to determine which factors
have the most dominant influence on
stock price volatility (Romli et al.,
2017).
The objective of this study is to
examine the impact of macro and
micro factors on the stock price
volatility. This research is essential
EAJ (Economics and Accounting Journal) - Vol. 3, No. 1, Jan 2020 - Sutrisno
74
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for the company to pay attention to
factors that can affect the volatility
of the company’s stock price so that
the firm can maintain share
performance. This study is also
beneficial to the investors in
investment decision making to see
what factors can affect the volatility
of the stock price.
2. LITERATURE REVIEW
2.1 Trading Volume
Trading volume is a vital aspect
for an investor because it reflects the
condition of shares traded on the
capital market affect the stock price.
Dewi and Suaryana (2016) state that
if there is no information about
stocks, investors are more likely to
keep holding their shares. Trading
volume will decrease because not
many shares are sold, then it will
result in low volatility. Vice versa, if
investors receive a lot of information
about a stock, then investors will sell
their shares a lot, this will result in
increased trading volume of shares.
As a result of the increase in trading
volume, the volatility also rises.
Chan and Fong (2000) found that
trading volume influences volatility
because the volume reflects the
information received by market
participants.
H1: Trading volume affects stock
price volatility.
2.2 Firm Size
Small company shares are more
liquid than a large company, causing
the stock price to be more volatile.
Hashemijoo et al. (2012) find that
company size significantly affects
stock volatility. The bigger the firm
size, the higher the diversification of
activities so that large companies
usually have more public
information and can reduce the level
of price volatility. Nasir et al. (2018)
find similar findings to Hashemijoo
et al. (2012).
H2: Company size affects stock
volatility.
2.3 Inflation
The higher the money supply will
lead to a higher discount rate and
lower stock prices. An increase in the
inflation rate will lead to tighter
economic policies and will hurt stock
prices. Hugida (2011) proves that
inflation affects stock price volatility.
The negative impact will encourage
investors to sell shares owned so that
it will result in increased volatility in
stock prices.
H3: Inflation affects stock price
volatility.
2.4 Exchange Rate
The exchange rate is the amount
of rupiah needed to get one unit of
foreign currency. The exchange rate
is one indicator that influences the
capital market and money market
activities. Yogaswari (2012) states
that the exchange rate affects price
volatility. If the dollar strengthens
and the rupiah weakens, then it is
likely that investors will tend to shift
their investment in US dollars in
foreign currency compared to
investing in stocks and vice versa.
H4: The exchange rate affects
stock price volatility.
3. RESEARCH METHOD
This study is explanatory
research. It is useful for examining
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the impact of independent variables
on the dependent variable.
3.1 Data Collection Techniques
This research uses secondary
data from www.finance.yahoo.com,
www.idx.co.id, www.bps.go.id, and
www.bi.go.id.
3.2 Operational Definitions of
Variables
The dependent variable of this
research is stock price volatility. This
study applies four independent
variables, namely trading volume,
firm size, inflation, and exchange
rate. The calculation of each research
variable is explained as follows.
I employ range-based volatility
to calculate stock price volatility
(Sutrisno, 2017).
2
is stock price volatility, Ht is the
highest price, Lt is the lowest price,
and n is the number of days in a year.
The computation of trading
volume uses the following formula.
Firm size is calculated by using
the following formula.
The inflation rate is computed by
using this formula.
CPI is consumer perception index.
The formula of the exchange rate
is as follows.
3.3 Sample Collection Techniques
This study uses a purposive
sampling technique to determine the
research sample. The criteria for the
sample selection process are as
follows: (1) the companies are
consistently included in the Jakarta
Islamic Index from 2014 to 2018,
and (2) the companies have complete
data. The final sample is sixteen
firms for the last five years. This
study has eighty observations.
3.4 Data Analysis Techniques
This study employs panel
regression to hypotheses testing.
First, this study displays the
summary statistics of each variable.
Second, the study determines the
best estimation method. The next
step is the classical assumption tests.
The last stage is hypotheses testing
using probability value. The level of
significance in this study is 5%. This
study uses EViews 10 to process the
research data.
4. RESULTS AND
DISCUSSION
Descriptive Statistics
Table 1 displays the summary
statistics of each variable. The
average stock price volatility is
3.06%. Meanwhile, the average
trading volume is 30.90%. Firm size,
inflation, and exchange rate have
mean values of 18.10, 5.34%, and
9.48, respectively.
Table 1: Descriptive Statistics
Variable
Me
an
Me
dian
Min
Ma
x
Std.
Dev.
Volatilit
y
0.03
06
0.03
05
0.05
37
0.01
75
0.00
82
Trading
0.30
0.29
0.91
0.02
0.15
EAJ (Economics and Accounting Journal) - Vol. 3, No. 1, Jan 2020 - Sutrisno
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Volume
90
56
53
98
06
Firm
Size
18.0
957
18.0
899
20.8
422
16.0
789
1.15
66
Inflation
0.05
34
0.03
61
0.08
38
0.03
02
0.02
49
Exchang
e Rate
9.47
53
9.50
19
9.53
21
9.40
83
0.04
83
Determining the Best Estimation
Method
This research employs the Chow
test, Hausman test, and Lagrange
Multiplier test (LM test) to choose
the best estimation method
(Ekananda, 2016). The results of the
Chow test, Hausman test, and LM
test are summarized in Table 2.
Chow test reveals that the best
estimation method to choose is the
fixed effect. The Hausman test states
that random effect is the best
estimation method to determine. LM
test explains that random effect is
chosen as the best estimation
method. Therefore, the random effect
is used to estimate panel data.
Table 2: Determination of the Best
Estimation Model
Prob.
Conclusion
Chow Test
0.0000
Fixed Effect
Model
Hausman
Test
1.0000
Random Effect
Model
LM Test
0.0298
Random Effect
Model
Classical Assumption Tests
This study does not use the
classical assumption tests because
the best estimation method chosen is
the random effect model. According
to Gujarati and Porter (2010),
equations that meet classical
assumption tests are only equations
that employ the generalized least
square (GLS) method. In EViews,
the estimation model that uses the
GLS method is an only random
effect; meanwhile, the fixed effect
and common effect employ ordinary
least square (OLS).
Hypotheses Testing
Table 3 summarizes the result of
panel regression. The regression
equation is as follows.
The results of the probability
value of each independent variable
can be described as follows:
1) Trading volume has a
significant positive effect on
price volatility because the
coefficient is positive, and its
probability value is less than
5%. Thus, hypothesis one is
accepted.
2) Firm size has a significant
negative effect on stock price
volatility because the
coefficient is negative, and its
probability value is smaller
than 5%. Hypothesis two is
accepted.
3) Inflation does not influence
stock volatility because its
probability value is more than
5%. Therefore, hypothesis
three is rejected.
4) The exchange rate does not
have an impact on price
volatility because its
probability value is bigger
than 5%. Thus, hypothesis
four is rejected.
The coefficient of determination
(R-squared) of this study is 16.35%.
It means that trading volume, firm
EAJ (Economics and Accounting Journal) - Vol. 3, No. 1, Jan 2020 - Sutrisno
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size, inflation, and exchange rate can
explain stock price volatility of
16.35%, while the rest (83.65%) is
explained by other variables not
included in the research model.
Table 3: The Result of Panel Regression
Variable
Coefficient
Prob.
Constanta
0.222466
0.6397
Trading Volume
0.011344
0.0297
Firm Size
-0.002834
0.0024
Inflation
0.024566
0.7992
Exchange Rate
-0.015343
0.7570
R-squared
0.163548
Discussion
The Effect of Trading Volume on
Stock Price Volatility
This study finds that trading
volume positively and significantly
affects stock volatility. The higher
the trading volume, the higher the
stock volatility. This finding is in
line with Chan and Fong (2000),
Hugida (2011), Dewi and Suaryana
(2016), Romli et al. (2017), and
Nasir et al. (2018). The small trading
volume indicates that investors are
not interested in investing. On the
reverse, the large trading volume
shows that many investors are
interested in making transactions to
buy and sell shares so that stock
prices are more volatile.
The Effect of Firm Size on Stock
Price Volatility
This study shows that company
size negatively affects stock price
volatility. The smaller the firm size,
the higher the volatility. This result is
similar to Anastassia and Firnanti
(2014) and Nasir et al. (2018). Small
stocks are more volatile than big
stocks, so that their stock price
fluctuates. A large amount of
company assets does not necessarily
have a positive relationship with the
volatility of the company's stock
prices. The larger the firm size, the
higher the diversification of
activities. This condition can reduce
the volatility level.
The Effect of Inflation on Stock
Price Volatility
Inflation has no significant
impact on price volatility. This study
supports Yogaswari et al. (2012) and
Romli et al. (2017). Investors who
want to invest in JII stocks need not
consider the inflation rate as long as
the inflation rate is under 10%.
Investors assume that investing in JII
stocks will continue to generate
profit because JII stocks are Islamic
stocks with high liquidity.
The Effect of Exchange Rate on
Stock Price Volatility
The exchange rate does not affect
stock volatility. This result is not
similar to Amin and Herawati
(2012). They find that the exchange
rate significantly and negatively
affects stock volatility. This different
result can be caused by the
difference in the research sample and
period. The insignificant exchange
rate informs that strengthening or
weakening the exchange rate does
not have an impact on stock
volatility. If the rupiah and dollar
EAJ (Economics and Accounting Journal) - Vol. 3, No. 1, Jan 2020 - Sutrisno
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strengthen, then investors tend to
divert their investment in the form of
shares compared to investing in
foreign exchange.
5. CONCLUSION
This study concludes that trading
volume shows a significant positive
effect on stock price volatility. Firm
size negatively affects stock
volatility. On the other hand,
inflation and the exchange rate have
no relationship with price volatility.
This study implies that the
companies included in JII from 2014
zto 2018 should pay more
attention to internal factors,
especially in trading volume and firm
size, so that they can maintain their
share performance. The investors
should consider the trading volume
and firm size in their investment
decision. This study has two
recommendations for future studies.
First, further studies can use another
proxy for price volatility, such as
squared returns. Second, future
research can use other factors that
affect stock price volatility.
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