The Determinant Factors Of Equity Return

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The determinant factors of equity return in Indonesia
Background
Studies about determinant factors of equity return in each country is useful for global portfolio managers and global economic policy makers. Investors, in making profit, need to consider some risky aspects, to make speculation easier to be known, before investing in financial instruments in any country (Chandran et al. 2011, p.1). On the other hand, the government needs to attract capital inflow to support some development investments (Hadad cited in Hermansyah 2016).
Indonesia’s stocks have been sought by foreign investors due to their attractive returns, particularly after the announcement of GDP growth by the Indonesian government and the implementation of the
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2014, p.149). However, this theory has been challenged by Fama cited in Madsen (2005), indicates that besides inflation, income growth is also the function of equity returns (pp.1-2). According to Mishkin (2012), Fisher effect will only appear in samples when inflation and interest rates have trends (p.196).
Numerous studies have found that a negative relationship exists between inflation and real stock return without explanation about the relationship, that is known as “a stock return – inflation puzzle” (Ghafoor et al. 2014, p.149). The relationship between stock prices and inflation still interesting for researchers due to its puzzling result between developed and developing countries. The negative relationship between stock return and inflation was found in the US, South Africa, Brazil, Bahrain, Jordan, Saudi Arabia, while positive relationship was found in Malaysia, Turkey, Canada and Namibia (Chandran et al. 2011, pp.2-7). Adrangi et al. summarise the relationship into two propositions. The first proposition is the negative relationship between inflation and real economic activity, while the other proposition is the direct relation of stock returns to the real economic activity. He investigated those propositions on Chile and Peru, where there was a negative relationship between returns and unexpected inflation, while a
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