STOCK RETURNS: AN EFFECT OF INTEREST AND EXCHANGE RATE

Rika S. Martina, SE, University of Pancasila, Indonesia

Altyn K. Myrzashova, Prof, PhD, Kazakh-Russian International University, Kazakhstan

Gatut L. Budiono, Prof, PhD, University of Pancasila, Indonesia

Abstract: Information relevant to the development of changes in financial market

transactions is very important for financial investors; investment considerations

require detailed information in order to reduce losses and consideration of capital

market investment strategy formulation. Return and investment risk as well as

possible need to be considered by investors before the start of the investment because

the value of the interest rate a negative effect on stock returns and exchange rates can

be a positive influence on stock returns.

Keywords: Return of shares, interest rate and exchange rate

Background of Informations

Investor buyers a number of shares hoping to profit from rising stock prices

and dividends in the future in exchange for the sacrifice of time and the risk of the

investment made in shares. When people buy stocks, gains or losses on equity

investments is called return on investment shares. Stock returns in the form of growth

in the market or in the form of capital gains, referred to the percentage difference between the

selling price and the purchase price of the shares. Return extremely important determining

investment decisions. Basically the justification of the return must be analyzed, among

others, through the analysis of historical returns that occurred in the previous period, on the

basis of the analysis determined the desired level of return (Jogiyanto: 2010). At this time

the local and foreign investors to invest heavily banking stocks. Shares of the banking

industry are in great demand by investors. This is evident from a comparison of the

total market capitalization of the banking industry with other industries (Indonesia

Stock Exchange, 2011: 11).

The banking industry shifted up and down to the present economic conditions,

the rate of profit of the banking industry is closely linked to the national economy and

directly affects the stock price. This is especially noticeable when the economic crisis

hit Indonesia in 1997, directly give effect to the average banking industry stock prices

fell to USD 450, -. Decline in the stock price caused by negative expectations by

investors on the performance of the banking industry so investors to make

investments in the banking industry declined (Kartini Harahap: 2006).

In the year 1997 the Indonesian economy in recession, the rupiah dropped

from the level of USD 2419 to USD 7100 per $ 1. Along with these conditions, the

interest rate of 70.81% has caused inflation to increase to 78% per year. The

economic recession is directly negative effect on the banking industry, on 1

November 1997 there were 16 banks were liquidated, and then on l April 1998 there

were seven banks that suspended operations and 7 banks taken over by BPPN. On

March 13, 1999, a total of 38 banks were liquidated and 7 bank taken over (Ali

Masyhud, Kartini, 2006). Banks that were liquidated and taken over mostly of the

company going public is significantly detrimental to investors; buying shares at a

higher risk if market risk is affected by fragile economic conditions (Elton and

Gruber: 2007).

The weakening of the rupiah to most significantly impact the business sector

who earns U.S. dollars and rupiah cost beneficial. As for the rupiah income, and have

a lot of debt in U.S. dollars is very detrimental (Kartini Harahap: 2006). But for the

banking industry the weakening of rupiah sharply increases the risk of foreign

currency loans. The increasing interest rates cause businesses unreasonably difficult

to pay the liability directly, and causes decreased levels of corporate profitability,

competitiveness levels also decreased along with the increasing number of

competitors. So, to minimize the risk of stock investment banking industry requires

an analysis of the factors that can affect yield, like external factors as in interest rates

and the exchange rate as a systematic risk (John White, 2002:15).

Research problem is the effect of interest rate and exchange rate on stock

return of the banking sector; what effect interest rate on banking sector stock returns

listed in the Indonesia Stock Exchange? What affect the rupiah / U.S dollar value

against the banking sector stock returns listed in the Indonesia Stock Exchange?

Objective of this paper is to analyze the effect of interest rate on stock returns of the

banking sector listed in the Indonesia Stock Exchange. Analyzing the effect of the

rupiah / U.S. dollar against the return of banking sector stocks listed on the Indonesia

Stock Exchange. A practical benefit of this paper is a consideration in investment

policies for investors, as an input investment decisions in the future for other parties

with an interest in stock investment.

Correlation of interest rates and exchange rates to stock return

Some researchers have conducted a study on the level of interest rates and

exchange rates to stock return. The results of several studies are used as a reference

and comparison in this study include: Bodie et al (2005) stated that changes in stock

prices are influenced by several factors, one of which is the interest rate. This is

supported by research conducted Utami and Rahayu (2003) who found empirically

influence interest rates on stock prices during the crisis in Indonesia. Research

conducted by (Kewal, 2012) and Mudji Utami and Mudjilah Rahayu (2003) suggests

that interest rates negatively affect stock returns. Granger (2000) had stated that there

is negative effect between interest rate and stock price. In addition, Mahmudul Alam

and Gazi Salahuddin (in Ahmad, 2010) also stated in accordance that there is a

negative effect between interest rates and stock returns. However (Mok, 1993) using

the model of Arima analysis found no significant relationship between these two

variables. Research conducted by Ajayi and Mougoue (in Fuady, 2009) found no

empirical evidence of the existence of a negative relationship between the foreign

exchange rate to stock prices. The research was carried out again by Slamet Sugiri

(2000) in the telecommunications industry which listed on the JSE, PT Indosat and

PT Telkom, the results showed that in the long run there is a negative relationship

between stock prices of telecommunications with the U.S. dollar exchange rate.

While Hardiningsih et al (2002) in his study entitled "The Effect of Economic Factors

against Risk Fundamentals and Stock Return in Jakarta Stock Exchange." In this

study, the dependent variable used is the exchange rate, inflation, ROA and PBV

while the independent variable is the stock return by means of regression analysis; the

results suggest that empirically proven that partially all dependent variables have a

positive effect on stock return except the rupiah / U.S. dollar negatively affect stock

returns. Research conducted by Mudji Utami and Mudjilah Rahayu (2003) in a study

entitled "The Role of Profitability, Interest Rates, Inflation and Exchange Rate Affect

Capital Market in Indonesia during the Economic Crisis". In this research the

independent variable is the profitability of the company, interest rates, inflation and

exchange rate while the dependent variable is the share price. The study uses an

object of research companies that are sensitive to changes in economic conditions

listed on the JSE. With the tools of regression analysis, the results of the study

suggest that the empirical evidence that profitability, interest rates, inflation and

exchange rate simultaneously affect stock prices significantly during the economic

crisis and empirically proven that the partial interest rate significantly negative and

the rupiah against the U.S. dollar have a significant positive effect on stock prices

during the economic crisis. Sri Suyati (2010) explains that the interest rate changes

have no significant effect, while the rupiah / U.S. Dollar have a significant positive

impact on stock returns. This means that when the rupiah / U.S. dollar weakened the

stock returns will decrease.

Interest Rate Effect on Stock Returns

The research conducted by Muhammad Ishfaq Ahmad et al (2010) stated that

the macroeconomic variables always have a significant impact on the stock market.

Ahmad finds that interest rates have a negative impact on stock returns. This is

supported by Granger (2000) stating that there is a negative effect between interest

rates and stock prices. The link between interest rates and stock returns also raised by

Bodie et al (2005) stating that the change in stock price is influenced by several

factors, one of which is the interest rate. This is supported by research conducted by

Utami and Rahayu (2003) who found empirically influence interest rates on stock

prices during the crisis in Indonesia. The theory is supported by research conducted

by Gudono (in Fuady, 2009) that interest rates negatively affect stock returns. From

exposure above it can be concluded that the level of interest rates affect stock returns.

Based on the above, the hypothesis proposed in the study is:

H1: The interest rate negatively affects stock returns.

Exchange Rate Effect to Stock Returns

Some empirical evidence regarding the effect of the rupiah / U.S. dollar to

stock return showed contradictory results, as stated in the study Hardiningsih et.al

(2001) showed that the value of the rupiah against the U.S. dollar negatively affect

stock returns. But in the study Kartini Harahap (2006) showed that the exchange rate

has no significant effect on stock returns. In a study conducted by Mudji Utami and

Mudjilah Rahayu (2003) showed that the value of the rupiah against the U.S. Dollar

positively influence the stock return. This is supported by the research results

Muhammad Ishfaq Ahmad et al (2010) which state that there is a significant positive

effect of the exchange rate with the stock return. Based on this theory, the hypothesis

proposed in this study is:

H2: The exchange rates of Rp / Dollar positively influence the stock return.

Figure 1. Effect of Interest Rate and Exchange Rate on Stock Return

H1

H2

Methods

Object of this study is the rate of SBI, the rupiah / U.S. Dollar, and the stock

returns of the banking sector companies listed on the Indonesia Stock Exchange

(BEI) for the period 2007-2010, but only 31 companies from seven (7) qualified company

data completeness. For more details, name of the issuer may be described in the following

table:

Tabel 1. Issuers in the banking sector period 2007 - 2010

Name of Banks Codes Business Sectors

Bank Central Asia Tbk. BBCA Banking

Bank Bukopin Tbk. BBKP Banking

Bank Negara Indonesia (Persero) Tbk. BBNI Banking

Bank Rakyat Indonesia (Persero) Tbk. BBRI Banking

Bank Danamon Indonesia Tbk. BDMN Banking

Bank Mandiri (Persero) Tbk. BMRI Banking

Bank Bumi Artha Tbk. BNBA Banking

Sources: IDX Monthly Statistic 2007-2010

Interest Rate

Stock returns

Exchange Rates

The data were obtained from the IDX Monthly Statistics. The data is in the

form of stock returns. Meanwhile, other data which include interest rate and exchange

rate obtained from www.bi.go.id. Processing the data in this study using the program

Microsoft Excel and SPSS 16.0 for windows.

The population of the study was all the company went public sector banks

listed in the Indonesia Stock Exchange during the study period January 2007 to

December 2010 by 31 companies. Purposive sampling method used in order to get a

sample in accordance with the objectives of the study. Purposive sampling method is

a sampling method that is based on certain criteria, where samples must meet the

following criteria: Listed on the Indonesia Stock Exchange during the period January

2007 to December 2010. Company shares actively traded each month during the

period January 2007 to December 2010. Based on these criteria, the number of

samples used in this study was 7 (seven) companies, namely Bank Central Asia Tbk.

(BBCA), Bank Bukopin Tbk. (BBKP), Bank Negara Indonesia Tbk. (BBNI), Bank

Rakyat Indonesia Tbk. (BBRI), Bank Danamon Tbk. (BDMN), Bank Mandiri Tbk.

(BMRI), dan Bank Bumi Artha Tbk. (BNBA).

Methods of data collection using the documentation by recording the average

data rate and monthly stock return rate listed in IDX Monthly Statistics and the

official website of Bank Indonesia (www.bi.go.id) the period between 2007 and 2010

and the period journals associated with this research. The sequence of data collection

to the data processing was such as collecting various theories in journals as a

reference. Download stock price data contained in IDX Monthly Statistics

(www.idx.co.id). Downloading of data rate and the exchange rate contained in the

official website of Bank Indonesia (www.bi.go.id). Processing data was using

Microsoft Excel program, including stock price data to get the average monthly stock

returns and data selling and buying exchange rate to get the value of the middle rate.

Processing the data was using SPSS. Meanwhile, data processing techniques using

multiple regression models to investigate the effect of variable interest rates and the

exchange rate on stock return then used multiple regression models with the basic

equation (Gujarati, 2006): Y = α + β1X1 + β2X2 + e; Description: Y = Return stock; α

= constant; β1-β2 = regression coefficient of each independent variable; X1 = interest

rate; X2 = Exchange Rate of Dollar; e = standard error.

Correlation test aims to examine the relationship between two variables does

not indicate a functional relationship (Nugroho: 2005). Also used hypothesis testing,

using regression analysis with t test and F test, the purpose of regression analysis is

used to determine the effect of independent variables on the dependent variable,

partially or simultaneously, as well as knowing the size of the dominance of the

independent variable on the dependent. Steps to test the hypotheses proposed in this

study are: T-test statistics, partial testing using t-test. The steps taken in the testing are

Prepare the null hypothesis (Ho) and the alternative hypothesis (Ha). Ho: β1 = β2 = β3

= 0, allegedly partially independent variables had no significant effect on the

dependent variable. Ha: βi ≠ 0, supposedly independent variables partially significant

effect on the dependent variable. Determine the level of significance (α) of 0.05. T

test compares the t table. If the t test is greater than the table t Ha accepted. T test can

be found by the formula (Gujarati, 2006):

If the table-t < -t test and t test < t table, individual independent variables did not

affect the dependent variable. If the test t > t-table and t test <-t table, individual

independent variables affect the dependent variable. Based on the probability, Ha will

be accepted if the probability value less than 0.05 (α). F Test was used to test the

significance of the influence of interest rates, trading volumes, and the exchange rate

against the property sector stock returns simultaneously. The steps taken were

(Gujarati, 2006): Formulate a hypothesis (H1), Ho: ρ = 0 allegedly independent

variables together had no significant effect on the dependent variable. Ha: ρ ≠ 0

allegedly independent variables jointly significant effect on the dependent variable.

Determining the level of significance of 0.05 (α = 0.05). Comparing F test with the F

table. Calculate the value of F can be found by the formula (Gujarati, 2006):

Where: r2 = Coefficient of Determination; K = number of regression coefficients; N =

number of observations. When the F test < F table then the independent variables

simultaneously have no effect on the dependent variable; When the F test> F table of

the independent variables simultaneously affect the dependent variable. Based on

probability, Ha will be accepted if the probability is less than 0.05. Determining the

value of the coefficient of determination, which shows how much the coefficients of

independent variables in the model used to explain the dependent variable. Test (r2),

coefficient of determination (r2) was used to measure how much the ability of the

model in explaining the variation in the dependent variable. The coefficient of

determination sought by the formula (Gujarati, 2006):

∑

∑

It is important to notice that determination coefficient is between 0 and 1. Smaller value of r2

is the ability of independent variables in explaining the variation in the dependent variable is

very limited (Ghozali, 2006). Value close to 1 (one) have meaning that the independent

variables provide almost all the information needed to predict the variation of dependent

variable.

Finding and Discussion

Development of the Banking Sector Company Stock Return Period 2007-2010. Stock

returns, as shown in table 2 below is used to illustrate the results obtained by investors on stock

investments. The results of the calculation of the stock return calculated on the individual

company's stock price on a monthly basis during the fourth period, namely from 2007 to 2010.

Table 2, Banking Sector Stock Return 2007-2010 (in %)

Banks 2007 2008 2009 2010 Σ Average

BBCA 3,35 -4,27 4,28 2,84 6,19 1,55

BBKP -1,06 -6,51 6,83 5,97 5,23 1,31

BBNI 1,31 -6,23 11,13 6,40 12,61 3,15

BBRI 2,73 -2,23 5,49 3,14 9,13 2,28

BDMN 1,97 -5,50 4,48 2,36 3,30 0,83

BMRI 2,24 -2,32 8,43 3,37 11,73 2,93

BNBA 3,09 -9,30 8,26 2,77 4,82 1,21

Σ 13,63 -36,36 48,90 26,84 53,02 13,25

Average 1,95 -5,19 6,99 3,83 7,57 1,89

Source: Data processed

The table and figure above describes the stock return of 7 banking sector companies

during the period from 2007 to 2010. Interpretation of the table and the picture above shows the

average stock return over 4 years to 7 companies of 1.89% and for each of the company's

average stock return is positive. Positive stock returns to explain that investing in shares in seven

companies, namely Bank Central Asia Tbk. (BBCA) 1.55%, Bank Bukopin. (BBKP) 1.31%,

Bank Negara Indonesia Tbk. (BBNI) 3.15%, Bank Rakyat Indonesia Tbk. (BBRI) 2.28%, Bank

Danamon Indonesia Tbk. (BDMN) 0.83%, Bank Mandiri Tbk. (BMRI) 2.93%, and the Bank

Bumi Artha Tbk. (BNBA) 1.21% profitable. While investing in stocks with negative stock

returns are unfavorable.

Figure shows that individual stock returns in 2008 the banking sector company entirely

negative, which means that the banking sector equity investment in 2008 was not favorable. The

decrease occurred because the stock returns in the global financial crisis hit almost all countries

in the world. This happens because of the housing credit crisis in the United States. The crisis

impact the collapse of the stock market in several countries including the collapse of the banking

sector share prices. Circumstances deteriorated when the banking sector many banks suffered

liquidity crunch. A decline in confidence in the banking system due to the case of many banks as

occurred in the Bank Century and Bank IFI. (www.setneg.go.id).

Development of Interest Rate period 2007-2010 are shown in Table 3 and 4 below, the

interest rate in December 2006 was 9.75% and the average interest rate in 2006 was 11.83%.

Table 3, Interest rate per month period 2007-2010 (in %)

Months 2007 ∆ 2008 ∆ 2009 ∆ 2010 ∆

January 9,55 -2,05 8,00 -1,03 10,07 -7,97 6,45 -0,46

February 9,25 -0,19 7,94 12,01 8,89 -6,64 6,42 -1,12

March 9,00 44,66 7,95 10,72 8,43 -4,62 6,34 -0,32

April 9,00 10,82 7,98 -3,44 7,83 -3,73 6,22 -1,13

May 8,80 -17,62 8,26 5,28 7,34 -3,74 6,29 0,98

June 8,56 -15,03 8,59 6,14 7,02 -6,84 6,26 0,65

July 8,31 -9,35 9,03 5,79 6,83 -3,88 6,25 -0,16

August 8,25 -0,56 9,26 2,79 6,65 -4,34 6,25 0,48

September 8,25 26,60 9,53 3,47 6,54 -0,94 6,25 -0,48

October 8,25 -5,51 10,70 4,83 6,50 0,63 6,25 -4,68

November 8,25 12,93 11,21 -0,80 6,49 -0,63 6,25 -4,57

December 8,08 -32,12 10,94 -2,52 6,48 -0,32 6,25 0,71

Average 8,63 1,05 9,12 3,60 7,42 -3,58 6,29 -0,84

Source: Data processed

Table 4, Average Annual Rate (in %)

Years Average Interest Rate per Year ∆

2006 11,83 -

2007 8,63 -27,07

2008 9,12 5,62

2009 7,42 -18,57

2010 6,29 -15,26

Source: Data Processed

The table and figure above shows the SBI in 2007 decreased by 27.07%. In 2008 SBI

rose 5.62%, this is because the depreciation of the Rupiah against the U.S. dollar, slowing the

rate of inflation, and domestic liquidity crunch because of the impact of the global financial

crisis. While the year 2009 to 2010 SBI rate continues to decline, it indicates that Indonesia's

economy has started to improve.

Rising interest rates are bad news for the stock market as investors will be interested to

invest their funds in the money market. This led to reduced demand for bonds and other

securities in the capital market (Bodie, et al, 2005). Exchange rate developments Rp / U.S. Dollar

Period 2007-2010 are shown in Table 4.5 and Figure 4.3 below, note exchange rate of Rp / U.S.

Dollar in December 2006 amounted to U.S. $ 9087 and the average exchange rate in 2006 was

Rp 9172).

Table 5, Progress Rate Monthly Period 2007-2011 (in Rp and %)

Months 2007 ∆ 2008 ∆ 2009 ∆ 2010 ∆

January 9.067 0,22 9.406 -0,78 11.167 1,39 9275 1,93

February 9.068 -0,01 9.181 2,39 11.853 -6,14 9.348 -0,78

March 9.164 -1,06 9.185 -0,04 11.850 0,03 9.169 1,92

April 9.098 0,72 9.209 -0,26 11.025 6,96 9.027 1,54

May 8.844 2,78 9.291 -0,89 10.393 5,74 9.183 -1,73

June 8.984 -1,58 9.296 -0,05 10.207 1,79 9.148 0,38

July 9.067 -0,93 9.163 1,42 10.111 0,93 9.049 1,08

August 9.367 -3,30 9.149 0,16 9.978 1,32 8.972 0,86

September 9.310 0,61 9.341 -2,09 9.901 0,77 8.976 -0,05

October 9.107 2,18 9.998 -7,04 9.483 4,22 8.928 0,53

November 9.264 -1,73 11.711 -17,13 9.470 0,13 8.938 -0,12

December 9.334 -0,75 11.325 3,30 9.458 0,13 9.023 -0,94

Average 9.139 -0,24 9.688 -1,75 10408 1,44 9086 0,39

Source: Data Processed

Table 6, Annual Rate Average Progression (in Rp and%)

Source:Data Processed

The rupiah against the U.S. dollar fluctuated throughout the year 2007-2010. In 2007, the

average exchange rate of around Rp 9139 per U.S. dollar, appreciated by 0.36% over the

previous year. By the end of October 2008, the exchange rate remained relatively stable. In

November 2008, the exchange rate fell sharply around Rp 11,711 per U.S. dollar. Until the first

quarter of 2009, depreciation is continuing as a result of continued deterioration of the global

financial crisis that began in the fourth quarter of 2008. However, since mid-2009 to 2010, the

exchange rate showed an appreciation trend again.

Years Average Annual Rate ∆

2006 9.172 -

2007 9.139 0,36

2008 9.688 -6,00

2009 10.408 -7,43

2010 9.086 12,70

Analysis

After processing using SPSS calculation of the obtained results are shown in some tables,

Table 7. Effect of Interest Rate (X1) and Exchange (X2) on Stock Return (Y)

Variable Mean Std.

Deviation n df

Correlation Regression r2

Sig.

Anova Hypothesis

Sig. Pearson t tTable

Stock

Return

(Y)

1.8929 11.20895

48 46

0.001 -0.420 -2.104

1.6787 0.280 0.001

Ho = rejected

Ha = accepted

SBI (X1) -0.8567 3.6354

Rate (X2) -0.0410 3.4568 0.001 0.457 2.543 Ho = rejected

Ha = accepted

Sources: Data Processed

The table 7 shows the mean value for the stock return variable (Y) by the number of data

(n) as much as 48% is 1.8929, meaning that these figures show that the average stock return of

banking companies during the year 2007-2010 amounted to 1.8929% . The standard deviation

for the stock return variable (Y) is equal to 11.2089, this figure shows that the standard deviation

for the stock return variable (Y) is relatively large because the value of the standard deviation

above the mean or average value.

The mean value in the variable interest rate change SBI (X1) is equal to -0.8567%,

meaning that these figures show that the average interest rate changes by -0.8567% SBI. The

standard deviation of a variable interest rate of SBI (X1) of 3.63537, indicating that the standard

deviation of a variable interest rate of SBI (X1) is relatively small because the value of standard

deviations below the mean or average value.

The mean value in the variable rate changes (X2) of -0.0410%, the figure shows the

average change in exchange rate is equal to -0.0410%. The standard deviation for the variable

rate (X2) of 3.45684, this figure shows the standard deviation of the exchange rate variable (X2)

is relatively small because the value of standard deviations below the mean or average value.

Significant correlation value of the independent variable interest rate of SBI (X1) is equal

to 0.001, and the value of Pearson corelation -0.420. means the variable interest rate of SBI (X1)

are associated with a strong negative stock returns dependent variable (Y), this is significant

because the value of SBI rate (X1) <0.05 or smaller than a predetermined standard error of 5%,

and value of P. Correlation in the range of 0.41 to 0.70 on the table boundary correlation

coefficient (table 3.2).

Significant correlation value of the independent variable rate (X2) of 0.001, and the value

of Pearson corelation 0.457, meaning that the variable rate (X2) are sufficiently strong positive

relation with stock return dependent variable (Y), this is significant because the value of the

exchange rate (X2) <0, 05 or smaller than a predetermined standard error of 5%, and the value

P.Correlation dikisaran rate from 0.41 to 0.70 in the table boundary correlation coefficient (table

3.2).

T value of independent variables SBI (X1) = -2.104, and the value of df = 46, the value of

t table = 1.687. Because value of -2.104 <-1.687 stated that there are negative effects between

changes in interest rates SBI with stock returns. So that the resulting outcome following

hypothesis: Ho: rejected and Ha: accepted.

T test of the independent variable rate (X2) = 2.543, with df = 46, the value of t table =

1.687. Since the value 2.543 > states that there is a significant effect of the exchange rate

changes to stock returns. So that the resulting outcome following hypothesis: Ho: rejected and

Ha: accepted.

According to the table 4.7 significance of 0.001. Because of the significant value of these

two independent variables are below 0.05 (0.001 < 0.05) states that there is a significant effect

between changes in interest rates and exchange rates SBI simultaneously to stock return. So that

the resulting outcome following hypothesis: Ho: rejected and Ha: accepted.

Adjusted r Square value is 0.248, indicating that stock returns (Y) independent of

changes in SBI (X1) and exchange rate (X2) 24.8% and the remaining 75.2% influenced by other

factors beyond the variable interest rate and exchange rate.

Data processing to obtain the results of constant β = 1.179, β SBI rate (X1) = -0.887, and

β rate (X2) = 1.128, that number can be created regression equation as: Y = 1,179 – 0,887 X1 +

1,128 X2; Y = Return stock; X1 = Interest Rate; X2 = Exchange. From the regression equation

above can be explained as follows: a) Constant value 1.179 states that if the interest rate (X1)

and exchange rate (X2) value 0 (a constant), then the stock return value is 1.179%. b) The

coefficient of the variable interest rate (X1) -0.887, suggesting that any increase in interest rate

by 1%, would return the shares to fall by 0.887% assuming exchange rate (X2) are constant. The

negative coefficient means negative relationship between interest rates to stock returns, the rising

interest rates fall then the stock returns, and vice versa. c) Regression coefficient of the variable

rate (X2) of 1.128 states that every 1% increase in exchange rate the stock return will increase by

1.128% assuming interest rate (X1) is constant. The coefficient is positive, meaning a positive

relationship between the exchange rate to stock returns, the rising exchange rate then the stock

return up anyway.

Table 8, Summary of Research Findings

No. Influence on stock returns Hypothesis Results Decision

1 Enterest rate - significant Accepted

2 Exchange rate + significant Accepted

Hypothesis Testing 1, the first hypothesis proposed interest rate and a significant negative

effect on stock returns of the banking sector, obtaining regression coefficient variable interest

rate of -0.887 with a significance of 0.041. Because of its significance is less than 5% or 0.05

then the first hypothesis is accepted which means there is a significant negative effect of the

interest rate on stock return of the banking sector. The results of this study are consistent with the

results of research conducted by Ishfaq Ahmad (2010), Gudono (1999), Utami and Rahayu

(2003), and Granger (2000).

Hypothesis Testing 2, the second hypothesis proposed exchange has positive and

significant impact on the banking sector stock return, exchange rate regression coefficient

obtained for 1128 with a significant level of 0.015, which is significant value much lower than

0.05. Thus, the second hypothesis states that the exchange rate has positive and significant

impact on the banking sector stock returns accepted. This study is consistent with results by

Ishfaq Ahmad (2010) and Utami and Rahayu (2003), but these results are not consistent with the

study conducted by Hardiningsih et al (2001).

Discussion of Research Findings

Interest rate effect on stock return, the first hypothesis proposed states that interest rates

significantly and negatively related to stock returns of the banking sector. From these results

obtained by the regression coefficient variable interest rate of -0.887 with a significance value of

0.041. Since the significance value is less than α = 5%, the first hypothesis can be accepted,

which means there is a significant negative effect of the variable interest rate on stock return.

These results illustrate that higher interest rates will lead to lower stock returns and vice

versa. In the face of rising interest rates, shareholders tend to sell their shares back to the level of

interest rates at levels that are considered normal. These findings are consistent with the theory

that is used, which states that low interest rates will lead to lower borrowing costs. Low interest

rates will stimulate investment and economic activity will lead to stock price increases (Mok,

1993 in Dheny, 2009).

Associated with previous research, the results of this study are supported by Muhammad

Ishfaq Ahmad stated that interest rates negatively affect stock returns. But there is a difference

between the level of significance of this study to research done by Ishfaq Ahmad, it may be

caused by differences in the object studied. Ishfaq Ahmad used the stock market return as the

object of research, whereas this study uses stock returns of the banking sector which consists of

only seven companies. Theoretically, changes in the interest rate is inversely related to stock

return performance in the market (Tandelilin, 2010). This means that if interest rates decline the

return of shares in the market will tend to increase, and vice versa if the interest rate increase will

be followed by a negative reaction on the market performance. The test results in this study

indicate support for the theory.

The influence of exchange rate on stock return, the second hypothesis states that the

proposed exchange rate has positive and significant impact on stock returns of the banking

sector. The result showed the regression coefficients for the exchange rate variable with a value

of 1.128 significant at 0.015, level of significance is much lower than α = 5%. Thus, the second

hypothesis states that the exchange rate has positive and significant impact on the banking sector

stock returns can be accepted. The influence of the rupiah against the dollar indicates that the

strengthening of the rupiah exchange rate against the dollar may result in an increase in value of

the index of banking stocks.

In connection with previous research, this study is consistent and supports the results of

research conducted by Mudji Utami and Mujjilah Rahayu (2003), which states that the Rupiah

positive effect on stock returns. However, these results are inconsistent with the results of the

study Hardiningsih et al (2001), which states that the exchange rate negatively affect stock

returns. This may be due to differences in the samples used in the study Hardiningsih et al

(2001), the samples used are all companies listed in Jakarta Stock Exchange, while the samples

used in this study are 7 companies included in the banking sector.

Conclusion

This study attempts to examine, whether the changes in interest rates and exchange rates

can affect stock returns of the banking sector. The results of hypothesis testing using multiple

regression analysis with two independent variables which are interest rate and exchange rate and

dependent variable which is stock returns.

Based on the results of testing hypothesis 1 indicates that partially variable interest rates

significantly and negatively related to stock returns of the banking sector. Because the interest

rate is inversely proportional to stock returns, then rising interest rates will affect the sluggish

investment and economic activity resulting decline in stock returns.

Based on the results of testing hypothesis 2 suggests that partially variable currency

exchange rates have a positive and significant impact on stock returns of the banking sector. The

results suggest that stock returns are sensitive to the exchange rate with the positive direction

indicating changes in stock returns will increase if the exchange rate is also increasing.

The results showed little effect of interest rate and exchange rate on the dependent

variable is the stock return can be explained by the regression model to the companies included

in the banking sector amounted to only 24.8% and the remaining 75.2% is influenced by other

factors that are not included.

Suggestions

Investors in the banking sector is one of the important sectors in Indonesia should review

and consider first the movement of macro variables, namely interest rates and exchange rates

affect stock returns in the sector. It is expected to consider both of these things can determine the

selling or buying of shares in the banking sector.

If the value of the rupiah against the dollar began to strengthen the players should share

purchase shares of the banking sector because, according to the results of this study predicted

banking stocks would rise. Conversely, if the value of the rupiah weakened against the dollar it is

advisable to sell the shares of the banking sector due to stock prices in the sector will start to fall.

In terms of interest rates, if macroeconomic conditions began to show an increase in

interest rates should sell shares of stock players banking sector since the results of this study

predicts that stock returns will fall if interest rates increase. Conversely, if the macro economy

showing declining interest rates expected players to purchase shares of stock of the banking

sector due to expected stock returns of the banking sector will increase.

For academia, the research will be known variables that can influence stock returns and

the banks are able to assess which factors have a significant influence on stock return of the

banking sector.

Agenda for future research should be done with the scope of the object of research

studies with a longer time span and other macro variables. Macroeconomic variables that might

affect stock returns, among others: the level of inflation, economic growth, market risk and

economic conditions so as to provide a more comprehensive picture of the research results.

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