Investor Sentiment as a Selective Mediator of Geopolitical and Macroeconomic Effects on IDX Composite Volatility

Abstract

Indonesian equity-market volatility reflects both macroeconomic information and investors’ psychological responses to that information. This study examines the effects of geopolitical risk, inflation, the exchange rate, and the policy interest rate on investor sentiment and IDX Composite volatility, and tests whether sentiment mediates those effects. Monthly data from January 2021 to May 2026 yield 63 observations after influential-observation diagnostics; S&P 500 volatility is included as a global control. Both equations are estimated with HAC/Newey–West standard errors, and mediation is tested with PROCESS Macro Model 4 using 5,000 bootstrap samples. Only the BI-Rate significantly reduces investor sentiment. Rupiah depreciation raises IDX Composite volatility, whereas investor sentiment and the policy rate reduce it. Inflation is significant in the baseline sample but not in the 65-month robustness check. Geopolitical risk is insignificant in both equations. Sentiment mediates only the interest-rate channel, and the mediation is competitive: the direct effect of the policy rate on volatility is negative, while the indirect effect through weaker sentiment is positive. Mixed orders of integration imply that the level estimates should be read as sample associations rather than long-run multipliers. Investor sentiment is therefore a selective, not universal, transmission mechanism for monetary-policy information in the Indonesian equity market.