International Research Journal of Finance and Economics
ISSN 1450-2887 Issue 33 (2009)
й EuroJournals Publishing, Inc. 2009
http://www.eurojournals.com/finance.htm
Nelmida
PhD Student at Graduate School of Management Universiti Putra Malaysia and Lecturer in the Department of Management Faculty of Economics, University Bung Hatta in West Sumatra, Indonesia Annuar Md.
Nassir
Department of Accounting and Finance Faculty of Economics and Management Universiti Putra Malaysia
Taufiq Hassan
Department of Accounting and Finance Faculty of Economics and Management Universiti Putra Malaysia
Abstract
Stock market efficiency is an important concept, especially in understanding the working of the stock markets particularly in emerging stock market such as Indonesia. The efficiency of the emerging markets assumes greater importance as the trend of investments is accelerating in these markets as a result of regulatory reforms and removal of other barriers for international equity investments. This study provides empirical evidence on the impact of new information regime on the efficiency of the Jakarta Stock Exchange by using weak-form efficiency test. This study uses data from the returns series of the Composite Index and selected individual companies before regulation changes from 1991 to 1995 and after regulation changes from 1996 to 2004. This paper employs the BDS test, which is widely used to distinguish random independent and identically distributed error terms. Three variants of BDS were performed to evaluate weak-form efficiency namely: (i) the normalized BDS test, (ii) the BDS test under ARMA and (iii) the BDS test under EGARCH. The findings indicate that in general and with exceptions the null hypothesis of independent and identically distributed (iid) error term is not rejected and insignificant at the 5% level on the Composite Index and individual companies before and after regulation changes and more prominent after the imposition of the new information regime. The results suggest that it is difficult to reject the random walk hypotheses for most of the return series after the regulatory reform. This result confirms that the market is weak-form efficient, except for daily and weekly returns before regulation changes and except for daily return after regulation changes. The results also implied that the new information regime have impacted on the Jakarta Stock Exchange by making it becoming more efficient.
Keywords: Weak-form EMH, the Jakarta Stock Exchanges, BDS Test, information regime.
JEL Classifications Codes: G10, G14, and G18. 1.
Introduction
Stock market efficiency is an important concept for understanding the working of the capital markets particularly in emerging stock market such as Indonesia. The efficiency of the emerging markets assumes greater importance as the trend of investments is accelerating in these markets as a result of regulatory reforms and removal of other barriers for the international equity investments. There is enough evidence concerning the validity of the weak-form efficient market hypothesis (EMH) with respect to developed and emerging stock markets of the world. The weak-form of the EMH postulates that successive one-period stock returns are independent and identically distributed (iid). This paper attempts to investigate the impact of new information regime on the Jakarta Stock Exchange by using the BDS weak-form efficiency test. This paper used three different models of the BDS test namely the normalized BDS tests, theBDS test under ARMA and the BDS test under EGARCH as proposed by Brock et al. (1987) and Nelson (1991).This rest of the paper is organized as follows. Section 2 overviews the efficiency evidence on the Indonesia market while section 3 describes the data collection procedure and methodology. Section4 discusses the findings and section 5 concludes the paper. 2. Review of literature Relatively few evidences were available evaluating the efficiency of the Jakarta Stock Exchange. Suad (1987) and Rusiti (1990) found that the market is fairly efficient in the weak sense. However, Suad (1990), Balsius (1993) and Agus (1995) found that the sufficient conditions for weak form of efficiency were not satisfied. Further, Suad (1990) also investigated the semi strong form efficiency using earnings, additional issues, and new issues announcements. The general findings indicate that market is notefficient in semi-strong form. Further studies by Rusiti (1990), Muhammad (1993), Agus (1995),Mutamimah (1995), Untung, and Sidharta (1998) substantiated the findings of Fuad (1990). Endang(2000) found that the share price response to bond announcements produces an average excess return significantly different from zero while Eka (2000) found that the average abnormal return is significantly positive at pre-announcement date of merger and acquisitions. In summary all the evidence leads to the conclusion that the Indonesian stock market is generally inefficient.
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