Interest Rates, Exchange Rates, Inflation, and Banking Stock Index Dynamics in Indonesia: Evidence from an Autoregressive Time-Series Model

ABSTRACT: This study examines the effects of interest rates, exchange rates, and inflation on Indonesia’s banking stock index using monthly time-series data from January 2020 to December 2024. The analysis employs a multiple regression model augmented with an AR (1) term to address autocorrelation and capture dynamic persistence in stock index movements. The empirical results show that interest rates exert a positive and statistically significant effect on the banking stock index, suggesting that higher policy rates may improve investor expectations of banking profitability through wider net interest margins. In contrast, exchange rates and inflation do not have statistically significant effects during the observation period, indicating that the Indonesian banking sector is relatively resilient to short-run fluctuations in external prices and domestic inflation. The AR (1) coefficient is positive and significant, confirming that the current banking stock index is partly explained by its own past value and revealing a momentum pattern in banking stock movements. These findings imply that banking stock performance in Indonesia is shaped not only by macroeconomic fundamentals, but also by time-dependent market dynamics. This study contributes to the literature by showing the sector-specific transmission of monetary variables to banking stocks and by demonstrating the usefulness of an autoregressive specification for improving model reliability and interpretation in emerging capital market studies.