INTRODUCTION

All investors always has high expected for return an investment and try to reduce the
risk, especially when it involves into two countries between Malaysia and Indonesia. Investor
is not really doing the exact risk and return on he/her investment right now. So, they will be
doing investment analysis before making an investment, analysis of investment could be
achieved by analysing current trends, the dynamics of the portfolio and the global economic
conditions. According (Schwert (1989) and Flannery and Protopapadakis (2002)), a number
of analysts studied the effect of macroeconomic factors on the stock return and global
linkages. However, most of these studies focused on developed markets with use the model
Autoregressive Conditional Heteroscedasticity (ARCH) and the Generalized ARCH
(GARCH), checked the effect of domestic macroeconomic variables on US stock volatility
and they found the limited evidence that stock market return which are inherently
unpredictable could be predicted by these factors.

In our researcher we using the Gross Domestic Product (GDP) and exchange rates as
independent variable and Kuala Lumpur Stock Exchange (KLSE) and Jakarta Stock
Exchange (JKSE) and dependent variable, and the researcher test either the independent
variable influence the dependent variable. The data collect quarterly for Malaysia starting
2015 to 2019 and Indonesia starting 2010 to 2019. The characteristic of each firm in a
country is different from one another the characteristics of the company were, size, price ratio
(E/P) profit, cash flow to price ratio (CF/ P), sales growth and market equity ratio (B / M)
book. (Lau, Lee and Mclnish, 2002; Lim and Dollery, 2007; Morelli 2007).
 The exchange rate is the main factor influence Kuala Lumpur Stock Exchange and
Jakarta Stock Exchange, Jakarta Stock Exchange and Kuala Lumpur Stock Exchange is
inverting, when the Exchange rates Indonesia going down all investor will buy the stock from
Indonesia and holding the stock and the exchange rates Indonesia going up this situation give
profit to Indonesia stock holding to sold the stock and making the profit. “Hamao, Masulis
and Ng (1990), Bae and Karoyli (1994) and Susmel and Engle (1994) focused on the
international spillover of stock return volatility between Japan, The United Kingdom and The
United States and found some evidence of spillover between these market were further
investigated by Kim and IN(2002). The result indicated that the movements of the major
stock markets (namely Japan, The United Kingdom and The United States) and some
macroeconomic news significantly influence the Australian stock market”.

In Indonesia, the price of share listed on the Jakarta Composite Index (JCI) is rising
according to several factors. JCI movement is related to macroeconomic factors such as
inflation and Rupiah exchange rates, inflation is the rise in the price of good and services,
while Rupiah trade is a Rupiah value relative to other foreign currencies (Appollo and
Zulkifli 2019). A stock exchange market is the hub of a trading networks, where securities
buyer and seller meet at agreed price. Financial market play a key role in the mobilization of
capital in developing and developed countries, resulting in the country's economic and trade
growth as a result of liberalized and globalized policies adopted by booth developing and
developed governments. The stock market is one of the most important elements of a free
market economy, because it helps allocate resources from shareholders to investor for
businesses in return for shareholding in ownership. The stock exchange provides companies
with the facility for capital raising through the sale of shares to investors (Black & Gilson,
1998).
 Macroeconomics is a branch of economics which discusses an economy as a whole’s
efficiency, structure, actions and decision – making. It includes national, regional and global
economies. Macroeconomics is the cumulative economic measures such as GDP,
unemployment level, price indices, and the interconnections between the different economic
sectors that help to better understand how economy as a whole works. Many highly
interrelated economic, social and political factors influence the stock market and these factors
interact very complicatedly with one another. “Therefore, it is generally to identify the
effective factors on the stock price index. Over the past few decades, the interaction of stock
market and macroeconomics variables has been an interesting study for the relationship
between macroeconomic variable and the stock market in both developed and developing
countries (Rad, 2011)”. The previous studies such as (Fama 1981), (Geske & Roll 1983) and
(Chen, Roll & Ross 1986) the link between increased stock market volatility and the
movement of macroeconomic variable has also been indicated, among others.

In recent years, Malaysia and Indonesia have created significant opportunities for
foreign investors as these countries are defined both by challenges and benefits associated
with emerging markets and by their ability to encourage foreign investment. In addition, in
recent decades, Malaysia and Indonesia have undergone the financial reform that encourage
their economic performance and facilitate cross – country investment. In Malaysia and
Indonesia, the study of stock market volatility offers useful information for investment
diversification and for policy makers monitoring the stability of Malaysia and Indonesia stock
markets. It has been generally argued that financial markets play an important role in
economic growth and development by promoting capital accumulation and serving as a
mechanism for the efficient allocation of resources. The volatility of the stock market can
therefore harm the smooth functioning of the financial system and negatively affect economic
performance and growth (Merton & Bodie 1995; Mala & Reddy 2007)
 The general attempt to connect stock market and macroeconomic variable was only
made in relation to the return on stock (first moment). Studies investigating the relationship
between stock market volatility (second moment) and macroeconomic variable in Asia
countries neglect the link between foreign stock markets. For example, the Malaysia and
Indonesia stock markets are expected to interact because Malaysia and Indonesia are located
in the same area and are characterized by similar cultural and policy implementations, as well
as close ties in trade policies (Gee & Karim, 2010). Therefore, the determinant factors of
stock market volatility in Malaysia and Indonesia need to be examined by a process that
efficiently manages autocorrelation between the error terms. Zellner (1962) implemented the
Seemingly Unrelated Regression (SUR) approach, does not impose any assumptions on error
correlations and easily incorporates limitation on the coefficients. Consequently, the SUR
method is effective in the case of autocorrelations across abnormalities (Engle & Rangle,
2008). “As a further contribution, the models developed in the present study include trade
openness to investigate the causal relationship between trade openness and stock market
volatilatily. It is accepted that an open economy will encounter a greater numbers of adverse
shock because of more international risk sharing between market (Haddad, Lim, Pancaro, &
Saborowski, 2013). Trade openness is therefore an important factor in transmitting volatility
between countries, and is critical for predicting volatility.