Analysis of Cointegration and Causality Relationship among Selected Stock Market Indexes in the World and Indonesia Stock Exchange Composite Index (IHSG) for the Period 2005-2017

This research aims to analyze the cointegration and causality relationship among selected stock market indexes in the world and Indonesia Stock Exchange Composite Index (IHSG) for the period 2005 until 2017. The stock market indexes are selected based on the trading relationship between Indonesia and other countries in the non-oil and gas sectors. The selected stock market indexes are Dow Jones Industries Average, Bombay Stock Exchange Sensex, Kuala Lumpur Stock Exchange, Nikkei, Korea Stock Exchange, Stock Exchange of Thailand, Shanghai Composite, Straits Times Index, and Indonesia Stock Exchange Composite Index (IHSG). This research is a time series research which uses monthly data from January 2005 until December 2017 and Augmented Dickey-Fuller Test, Lag Optimum, Johansen Cointegration Test, Granger Causality Test, Vector Error Correction Model (VECM), Variance Decomposition, and Impulse Response Function. The results of the research show that there is cointegration among selected stock market indexes and Indonesia Stock Exchange Composite Index (IHSG) and there is causality among selected stock market indexes and Indonesia Stock Exchange Composite Index (IHSG).


Introduction
The integration of global finance triggers investors to invest out of their country for the sake of their portfolio's diversification. The kind of relationship that can happen on finance integration with the capital market is an investment in foreign companies by the investors. The amount of investment in a country can be seen through the country's stock index. Perdana (2012) about the interaction between Indonesia's stock index movement and global said that the stock index is getting more integrated globally. That is because liberalization, increase in trade, decrease in legal control, and the advancement of the world's technology make investors interested in investing. Those things make investing more attractive to investors (Srivastava et al., 2015). However, along with the advancement of the world's trade, there are also negative influences.
According to Asia's financial crisis in 1997, it also affects capital market. That notion was supported by Janor et al. (2007) that the crisis in 1997 causes some impacts for ASEAN countries. The crisis in 1997 causes some impacts for ASEAN countries. Aside from that, the subprime crisis in 2007 is also another phenomenon in the world (Srivastava et al., 2015). The crisis in 2008 resulting in a decline in Indonesia's IHSG after China, Philippines, Malaysia and Hong Kong (China) had a more than 20% decrease in the stock index. The decline in stock index was followed by the decline of the market capitalization and a country's price earning (PE). That phenomenon could make the investors become more selective on doing investment. This is because investing on foreign market gives the investors a chance to have a relationship with that country's or the global assets. There are also some advantages for the investors to get a high stock return and reduce the risks. Because of that, it is important for the investor to see the phenomenon that affects stock index thus increasing the interest on investing.
The integration of market also causes some Asian country's economy not protected by US and Japan's stock market transformation (Batareddy et al., 2012). Even though, some developed and developing countries integrated with the world's capital market (Johnson & Soenen, 2002). Several researches which show the integration of global finance market and domestic provide a way for foreign investment in Indonesia. Indonesia's economy itself shows stronger integration with global finance several years back.
According to the Bank of Indonesia, if seen from Indonesia's export, in 20 years since 1980 to 2008, non-oil and gas export in Indonesia's GDP increased from 8.4% to 20.9%. Based on the Ministry of Trade's data, Indonesia's export-import activity with partner countries 5 years back (2013-2017) was dominated by the non-oil and gas sector (see Table 1). The Ministry of Trade's report result is shown in the table.
Indonesia's export-import activity was originally dominated by oil and gas sector; the non-oil and gas sector now has kept on increasing since 1975. Indonesia's trade balance with trade partner countries in non-oil and gas export-import has reached 98% from all Indonesia's trade balance in the past 5 M. Octavia, C. Wijaya Open Journal of Business and Management  Indonesia's trade with foreign country according to the Ministry of Trade shows that there are eight countries that have the highest export-import trade activity with Indonesia. Those countries are the US, China, Japan, India, South Korea, Thailand, Singapore, and Malaysia. By the data of Indonesia's export-import activity and trading markets, we can explore the interaction and integration for top selected countries in the world to Indonesia stock markets.
That result can be seen with the existence of relationship between countries, both short-term and long-term. Short-term relationship between countries influences investor's decision making, whereas, long-term relationship can be a part of consideration to see a country's economic matters. The importance of the long run relationship of capital markets for the operation of a free-market economy is also known (Veerappa, 2016). According to Mukherjee and Mishra (2005) there exists cointegration between India's stock market with several countries including Indonesia. Based on previous research, there is a stock index volatility between countries when a phenomenon occurs in a country or globally. However, according to Nath and Verma (2003) there is no integration relationship between Singapore and India. Especially beforehand on Roca (1999) found on research shows that there is no significant relationship between Australia and its country trade partner from 1974 to 1995.
That contraction presumption explained that not all country interconnected in certain situations and conditions. Because of that, a country needs to see the countries that have short-term and long-term relationship with them. This research analyses the relationship of cointegration and causality among selected stock market indexes in the world and Indonesia Stock Exchange Composite Index (IHSG) in 2005-2007 that refers to previous studies. Those selected countries are China, The US, Japan, India, Thailand, Singapore, South Korea, and Malaysia.
The main objective of this study is to explore and analyze the causality and cointegration between the Indonesia stock market and selected stock markets in M. Octavia, C. Wijaya Open Journal of Business and Management the world during the period. The study investigated the degree of interdependency between the Indonesia stock market and selected stock markets in the world. This study also presents the current relationship Indonesia to the other countries and provides a preliminary framework for future studies by knowing the causality and cointegration of those countries. The results of this study can be used by investors to diversify stock portfolios, see the country's stock market whose more attractive, and have the potential to provide large profits. Besides, the results of this study are also beneficial for the Indonesia Stock Exchange in making recommendations for the government in making appropriate policies.
This study is expected to be useful to academicians and researchers.
The remainder of this paper is organized in the following section. The second section will provide a review of literature on the integration. The third section describes data that used in this study. The fourth section will provide the research methodology. The fifth section will provide a discussion of empirical findings. The sixth section presents a conclusion and managerial implication of the topic. The last section is acknowledgment. Patel's (2014) (Johnson & Soenen, 2002;Poshakwale & Thapa, 2009). Besides that, Bhattacharyya and Benerjee (2004) are using the Granger causality test to analyze European, US, and Asian M. Octavia, C. Wijaya Open Journal of Business and Management stock markets. Mahajan (2013) has investigated cointegration between the stock market of India, US, China, Singapore, and Germany on exploring the influence of US on global financial crisis 2008. The study used monthly data of the stock markets and Engle-Granger cointegration approach. This study is also used multivariate approach that given by Johansen (1988). The result stated that co-movement of the stock prices among the selected countries has increased, after the 2008 financial crisis. Veerappa (2016)   Fuller Test. The result shows there is no cointegration between IDX and Rupiah-US Dollar exchange rate even though there is gold price as control variable.

Literature Review
But, there is causality between return of stock price and exchange rate. The study is also supported by Sidhik (2017)  prices, exchange rate, and world oil prices, and bidirectional between world gold prices and rupiah exchange rate. But this research shows that there is no cointegration among those variables. In stock markets, some research also found no cointegration among selected stock markets (Nath & Verma, 2003;Jeyanthi & Pandian, 2008).
Based on those researches, there are several theories using on this research.
They are coupling and decoupling theory. Coupling is one of a method in probability theory from variable comparison (den Hollander, 2012). Coupling theory used to know several things, such as proving theorem limit, decreasing inequality, and obtain estimates. This theory usually is assumed with two variables which are inline and on similar probabilities. So, the probability will be showed similar too. According to Chen (2005) coupling occurs when independent variables meet and move in the same direction to the other. The coupling theory indicates the component moves towards the same point with the biggest possibility.
Decoupling occurs in capital markets. Developing countries are more significant grow than developed countries. It is because domestic growth and trading market (Pollen, 2009). It might be happened in long term the period. Decoupling occurs when two different assets (variables) move on the opposite direction. This is how decoupling theory comes up, decreasing a variable does not affect to other variables. So, the result will be opposite. The concept of decoupling can relate to short-term correlation due to shocks that happened in develop and developing countries. Conrad and Cassar (2014) analyze about the challenge of decoupling economic growth from environmental degradation in small island and indicate decoupling on some variables. The result found decoupling in some variables. The paper is also found that no cointegration in long run relationship (Kanas, 1998). The difference movement of stock prices of selected markets shows that decoupling theory has occurred.

Data
This research uses quantitative approach. It is because social reality is formed based on objectives facts. In addition, researchers have free values that can be measured and use statistics to collect the theories (Neuman, 2014

Methodology
Data analysis techniques which are used on this research have several stages to get the conclusion. The first stage of this technique analysis is descriptive analysis. Descriptive analysis is used to show characteristic of variable data. Next stage is stationary test. Stationarity test in this research uses Augmented Dickey Fuller Test. Stationarity test is an analysis to data to know that variable data are stationary or not. After data are stationary, this research is continued by lag optimum test. Lag optimum uses to show long lag in those data. After those several tests, this research has cointegration test uses Johansen's Cointegration Test. Johansen Cointegration Test is a test to see long term equilibrium relationship among variables one to the others. This test can be used in multivariate time series. The Johansen Cointegration Test's model using from Veerappa (2016) is shown in this Equation (1).
Next technique to know causality among the variables is causality test with Granger Causality Test. This test is a method that introduced in 1987 by Engel and Granger. Granger Causality test shows relationship between variables that happen when one variable affects another variable. The relationships are called unidirectional and bidirectional. Unidirectional occurs when one variable affects another variable. Bidirectional occurs when one variable affects another variable and vice versa. Brooks (2008) the research this test can reveal that one variable affects other variable but it does not define that the movement is the only one reason for another variable.
The result of Johansen Cointegration Test suggested stock market indexes to use one model from Vector Autoregression Model. Vector Autoregression Model (VAR) shows portray the relationship or correlation among the variables. The form of VAR divided into three parts shows dynamical equation. Three models in Vector Auto Regression are unrestricted VAR, restricted VAR, and structural VAR. Brooks (2008) tells that VAR model is a system that can be considered to observe the result of time series research, including univariate and multivariate. Based on previous researchers, stock market indexes tend to use restricted VAR. Restricted VAR is also known as Vector Error Correction Model.

VECM (Vector Error Correction Model)
In the final stage, VECM (Vector Error Correction Model) is used to know Open Journal of Business and Management correlation among variables long term and short term. VECM is a form of VAR that put in error correction term. This form is used to show suitable estimation among the variables that have cointegration. Giani (2014) used VECM model is shown in Equation (2) below.
( ) This research also uses variance decomposition and impulse response func-

Empirical Findings
The result of this research shows from several test, starts from descriptive statis-  Table 2), Granger Causality Test (see Table 3

), and Vector Error Correction
Model (see Table 4) which result shown in the table.

Johanson Cointegration Test
The result of this research shows that there is a relationship between the re-    Table 4. Vector error correction model. Indonesia's positive cointegrated relationship with Japan, China, and Singapore is because those three countries are in the same continent and interconnected in economy sector, including trade. Apart from that, Japan, China, and

Error Correction D (IHSG) D (DJI) D (BSESN) D (KLSE) D (KOSPI) D (NIKKEI) D (SET) D (SSEC) D (STI)
Singapore also have relationship with other countries that cause that country's stock movement to affect another country's stock movement that is in the same direction. China and Japan are on the top three biggest Indonesia's non-oil and gas export which could add up to 20.5% (Presiden RI, 2017). Japan, China, and Singapore have good relationships with Indonesia like opening up a chance for Indonesia to do trade and other various things that support Indonesia's economic matters. Japanese citizens also like to visit Indonesia in a big volume like China and Singapore. Besides, Japan is also the second biggest investor for Indonesia in the field of infrastructure that keeps on increasing each year. At the end of 2017, IHSG was increasing on sub sectors, as well as Japan's stock index and Singapore. It is also supported with researches by Nasser and Hajilee (2016), Bhattacharyya and Banerjee (2004). Relationship that occurs unidirectionally can provide a clearer definition compared with bidirectional causality relationship (Sørensen, 2005). Relationship among countries is consistent with coupling and decoupling theory, where variables have movement even though some are in the same direction and some are in the opposite direction. Variable No. 1 which shows movement that resulting in another stock index movement can show that change could happen because of an incident. Decoupling theory also explains that there is a degree of decoupling which is an index that is used to measure the compatibility of an independent from a variable that is used to measure a variable.

Granger Causality Test
Thailand was able to maintain its country growth throughout 2017 that was balanced by an improvement of consumption in the private sector. According to The World Bank (2017) Index relationship between Singapore and Malaysia causes the changes in IHSG which can be seen through three out of five Southeast Asia's stock indexes that are weakened, which are Singapore, Malaysia, and Indonesia (Marketbisnis, 2015). Singapore becomes one of the most influential stock markets for the global stock market and able to make Thailand and Malaysia make more efforts on increasing stock index and market capitalization so that they can compete. As a matter of fact, Singapore's stock index movement is also affecting Indonesia's stock market that is also in accordance to least square's research. Another phenomenon in Singapore that announced the termination of trading link between Singapore, Thailand, and Malaysia caused Thailand's stock index increase while Malaysia's lower than Singapore. Malaysia's rank that's on top of Indonesia is seen based on world's competitive rank that was conducted by IMD World Competitiveness Report (2016) that shows Malaysia's rank above Indonesia.

Vector Error Correction Model
The result of the research shows that there are cointegrated and causality rela-

Conclusion
There is cointegration relationship between selected stock market indexes in the shows that cointegration relationship with short term at certain lag among variables will generate similar.
The main result from this paper has important implication to several stakeholders who are interested in stock markets. The results can be used to the investor to get benefits through choosing investment on selected stock markets.
Indonesia Stock Exchanges also get the circumstances to give recommendation to policy makers in development of Indonesia's stock market. This result expected can be developed to researches and academicians to explore and analyze in other specific sectors or phenomenon, such as food and beverage or technology sectors. In future, the development of the country will be closer to the technology.