EMPIRICAL TESTING OF FAMA-FRENCH ASSET PRICING MODEL IN INDONESIA STOCK EXCHANGE DURING COVID-19 PANDEMIC

Authors

DOI:

https://doi.org/10.31000/dmj.v8i1.10106

Abstract

The volatility of the Indonesian Stock Exchange (BEI) increased significantly during the Covid-19 pandemic period. In this period return predictability and price volatility in the stock index experienced a single structural break. There is concern among investors and academics that the asset pricing approach model that has been empirically accepted so far is unable to explain the return or excess return of an asset or investment during the Covid-19 pandemic period. This research tests the significance of the size (market capitalization), profitability, value (book-to-market), investment, and market risk premium (Rm-Rf) factors on the excess return of stock portfolios on the Indonesian Stock Exchange during the Covid-19 pandemic period. Existing studies show that the Covid-19 pandemic has affected investor sentiment, causing investors to panic and be pessimistic about their investments. In addition, there were deviations from the efficient market hypothesis during several pandemic periods in several countries so that stock prices did not fully reflect the available information. After testing, it was found that the factors size (market capitalization), profitability, value (book-to-market), investment, and market risk premium (Rm-Rf) did not have a significant influence on the excess return of stock portfolios on the Indonesia Stock Exchange during the period Covid-19 pandemic.

References

Bachelier, L. (1900). Theory of Speculation: The Origins of Modern Finance, Annales scientifiques de l’Ecole Normale Superieure, p. 21-86.

Blackburn, D. W., & Cakici, N. (2017). Overreaction and the cross-section of returns: International evidence. Journal of Empirical Finance, 42, 1–14. https://doi.org/10.1016/j.jempfin.2017.02.001

Carhart, M. M. (1997). On Persistence in Mutual Fund Performance. The Journal of Finance, 52, 57-82. https://doi.org/10.2307/2329556

Cheng, Y., Yi, J., Yang, X., Lai, K. K., & Seco, L. (2022b). A CEEMD-ARIMA-SVM model with structural breaks to forecast the crude oil prices linked with extreme events. Soft Computing, 26(17), 8537–8551. https://doi.org/10.1007/s00500-022-07276-5

Coudert, V., & Gex, M. (2008). Does risk aversion drive financial crises? Testing the predictive power of empirical indicators. Journal of Empirical Finance, 15(2), 167–184. https://doi.org/10.1016/j.jempfin.2007.06.001

Cujean, J., & Hasler, M. (2017). Why does return predictability concentrate in bad times? Journal of Finance, 72(6), 2717–2758. https://doi.org/10.1111/jofi.12544

Dimitrios, Sveronis (2020). Fama-French 5-factor model: The performance in Developed markets excluding the U.S. https://arno.uvt.nl/show.cgi?fid=153547 "

Engelhardt, N., Krause, M., Neukirchen, D., & Posch, P. N. (2021). Trust and stock market volatility during the COVID-19 crisis. Finance Research Letters, 38, 101873. https://doi.org/10.1016/j.frl.2020.101873

Fabrizio Rossi and Maretno Agus Harjoto, (2020), Corporate non-financial disclosure, firm value, risk, and agency costs: evidence from Italian listed companies, Review of Managerial Science, 14, (5), 1149-1181 https://ideas.repec.org/a/spr/rvmgts/v14y2020i5d10.1007_s11846-019-00358-z.html

Fama, E. F., & French, K. R. (2015). A five-factor asset pricing model. Journal of Financial Economics, 116(1), 1–22. https://doi.org/10.1016/j.jfineco.2014.10.010 "

Fama, Eugene F. and French, Kenneth R., Dissecting Anomalies with a Five-Factor Model (June 2015). Fama-Miller Working Paper, Available at SSRN: https://ssrn.com/abstract=2503174 or http://dx.doi.org/10.2139/ssrn.2503174

Frensidy, B.. (2022, January 6). Mengenang Tiga Krisis Terakhir – Fakultas Ekonomi dan Bisnis Universitas Indonesia. https://feb.ui.ac.id/2022/01/06/budi-frensidy-mengenang-tiga-krisis-terakhir/

Griffin, J.M. (2002) Are the Fama and French Factors Global or Country Specific. Review of Financial Studies, 15, 783-803. https://doi.org/10.1093/rfs/15.3.783

Grossman, S. J. &. S. J. E. (1980). On the Impossibility of Informationally Efficient Markets. ideas.repec.org. https://ideas.repec.org/a/aea/aecrev/v70y1980i3p393-408.html

Harjoto, M. A., Rossi, F., Lee, R., & Sergi, B. S. (2021). How do equity markets react to COVID-19? Evidence from emerging and developed countries. Journal of economics and business, 115, 105966. https://doi.org/10.1016/j.jeconbus.2020.105966

Hong, H., Bian, Z., & Lee, C. (2021). COVID-19 and instability of stock market performance: evidence from the U.S. Financial Innovation, 7(1). https://doi.org/10.1186/s40854-021-00229-1

Hyndman, R.J. (2014). Measuring Forecast Accuracy. In: Business Forecasting: Practical Problems and Solutions, John Wiley & Sons, Hoboken, 177-183. https://www.scirp.org/(S(lz5mqp453ed%20snp55rrgjct55))/reference/referencespapers.aspx?referenceid=3083385

Neves, M. E. D., Pinto, M. A., De Assunção Fernandes, C. M., & Vieira, E. (2021). Value and growth stock returns: international evidence (JES). International Journal of Accounting and Information Management, 29(5), 698–733. https://doi.org/10.1108/ijaim-05-2021-0097

Novy-Marx, R. (2013). The other side of value: The gross profitability premium. Journal of Financial Economics, 108(1), 1–28. https://doi.org/10.1016/j.jfineco.2013.01.003

Ramelli, S., & Wagner, A. F. (2020). Feverish stock price reactions to COVID-19. The Review of Corporate Finance Studies, 9(3), 622–655. https://doi.org/10.1093/rcfs/cfaa012

Salisu, A. A., & Akanni, L. O. (2020). Constructing a global fear index for the COVID-19 pandemic. Emerging Markets Finance and Trade, 56(10), 2310–2331.https://doi.org/10.1080/1540496x.2020.1785424

Seungho Baek, Sunil K. Mohanty, Mina Glambosky, COVID-19 and stock market volatility: An industry level analysis. Finance Research Letters, Volume 37, 2020, 101748, ISSN 1544-6123. https://doi.org/10.1016/j.frl.2020.101748.

Sharpe, W.F. (1964) Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. Journal of Finance, 19, 425-442.

Singh, A. (2020). COVID-19 and safer investment bets. Finance Research Letters, 36, 101729. https://doi.org/10.1016/j.frl.2020.101729

Sutrisno, B., & Ekaputra, I. A. (2016). Uji Empiris Model Asset Pricing Lima Faktor Fama-French Di Indonesia. Jurnal Keuangan dan Perbankan. https://doi.org/10.26905/jkdp.v20i3.287

Wagner, A. F. (2020). What the stock market tells us about the post-COVID-19 world. Nature Human Behaviour, 4(5), 440. https://doi.org/10.1038/s41562-020-0869-y

Watanabe, A., Xu, Y., Yao, T., & Yu, T. (2013). The asset growth effect: Insights from international equity markets. Journal of Financial Economics, 108(2), 529–563. https://doi.org/10.1016/j.jfineco.2012.12.002

Downloads

Published

2024-01-17

Issue

Vol. 8 No. 1 (2024): January

Section

Articles

License

The author submits the manuscript with the understanding that if it is accepted for publication, the copyright of the article will be granted to the Dynamic Management Journal (DMJ), Management Study Program, Faculty of Economics and Business, University Of Muhammadiyah Tangerang, Indonesia as the publisher of the journal

Dynamic Management Journal (DMJ) first publication rights with works licensed simultaneously under a Creative Commons Attribution-ShareAlike 4.0 International License (CC BY-SA 4.0) which allows others to share (copy and redistribute material in the media or any format) and adapt (remix, modify, and build upon material) the work for any purpose, even commercially with acknowledgment of the work's authorship and initial publication in Dynamic Management Journal (DMJ). Authors may enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal published version of the work (for example, posting it to an institutional repository or publishing it in a book), with an acknowledgment of its initial publication in the Dynamic Management Journal (DMJ). Authors are permitted and encouraged to post their work online (for example, in an institutional repository or on their website) prior to and during the submission process, as this can lead to productive exchanges, as well as earlier and larger citations of published work (See The Effect of Open Access).