Proceedings of Annual Shanghai Business, Economics and Finance Conference
3 - 4 November 2014, Shanghai University of International Business and Economics, Shanghai, China
ISBN: 978-1-922069-63-4
Efficiency of the Indonesian Stock Market on Sectoral
Basis: Is there growing weak-form Market Efficiency
Ragnar Benediktsson and Erik Benrud
Given the importance of the growing role of the Indonesian economy but
lack of literature about the Indonesian stock market, a comprehensive
study to assess market efficiency in the Indonesian Stock Exchange is
both timely and needed. In this study we use eight major sectors that
comprise the Indonesian capital markets to test for weak-form efficiency of
Efficient Market Hypothesis. Our sample period is 18-year time span
divided into three sub-periods. We use parametric as well as nonparametric tests and trading strategies to test for weak-form efficiency. We
use runs test to check for randomness in the daily sector return series, an
auto correlation test to examine independence of the daily sector return
series and the Ljung – Box statistic to test for significance of
independence in the daily sector return series. The results of this research
paper offer supportive evidence for the rejection of the weak-form
efficiency level of the Efficient Market Hypothesis. However, looking at the
sub periods, we found partial evidence of increased weak-form efficiency
during the latter part of the sample. When applying trading strategies to
capitalize on the low level of market efficiency, we were able to show that
investors could have achieved superior results on a risk-adjusted basis
using widely available market information. The study also comes with
suggestions on improving the efficiency of the Indonesian capital markets
to further strengthen the development of the Indonesian economy.
Keywords: Efficient Market Hypothesis, Weak-Form Efficiency, Dynamic
Portfolio Management, Stock Market Efficiency.
JEL: E44 – Financial Markets and the Macroeconomy
JEL: G15 – International financial markets
JEL: N25 – Asia including Middle East
JEL: G14 – Information and Market Efficiency; Event Studies
________________________________________________
Ragnar Benediktsson, PHBS, Peking University, Shenzhen, China.
Erik Benrud, Drexel University, Philadelphia, Pennsylvania, USA.