Analysis Weak Form Efficiency in Indonesia Stock Exchange

Period 2011-2016

Evida Rahimah

, Indra Maipita

and Sri Fajar Ayu

Department of Economic Science, State University of Medan, Willem Iskandar Street,

Market V, Medan Estate, Indonesia

Department of Agribusiness, Universitas Sumatera Utara, Medan, Indonesia

Keywords: LQ 45, random walk, weak form efficiency

Abstract: Stock market efficiency is a very important study, because an inefficient market allows the market

authorities to consistently obtain an abnormal return indicated by stock returns showing predictable

behavior or not following a random walk pattern. The purpose of this study is to find out whether stock

returns on the Indonesia Stock Exchange are random walk evidenced from non-parametric tests (runs test)

and parametric tests (unit root test). This study uses 34 samples, namely the issuer in the LQ45 index, with

the study period from January 2011 to December 2016. The data used in this study is the LQ45 index

weekly stock closing price from January 2011 to December 2016 obtained from the publication report

Indonesia stock exchange. This study using a significance level of 5%. The analytical method used is non-

parametric test (Run Test) and parametric test (Unit Root Test). The result of the research shows that stock

return of Indonesia Stock Exchange are not random walk or inefficient in weak form.

1 INTRODUCTION

Disclosure of information is a reflection of an

efficient capital market. Where the efficient market

theory proposed by fama defines the efficiency of

the capital market as a market where prices fully

reflect all available information (Fama, 1970). The

faster the new information is reflected in the price,

the more efficient the capital market. Thus the

presence of information has an important role in

stock trading in capital markets conducted by

investors. This information is needed in making

decisions related to the selection of investment

portfolios that provide the highest level of profit

with a certain level of risk (Setiawati, 2013).

If the equity markets work efficiently, the price

would indicate the intrinsic value of the shares and

in exchange, limited savings will be allocated to

productive investment sector in an optimal way in a

way that will provide a stream of benefits for

individual investors and the national economy as a

whole (Copeland and Weston, 1988). Thus there is

no opportunity to obtain information that allows

market authorities to consistently gain an abnormal

return, because market returns show unpredictable

behavior (Khairunnisa, 2015). Conversely, if an

inefficient capital market can complicate various

parties (Rahman, 1991), ie issuers difficulty in

measuring the maximum shareholder wealth.

Whereas for investors, of course, many will suffer

because inefficient market conditions make a lot of

manipulation that can be done to increase stock

prices. Lastly, with this can prompt investors to

reduce their investment in the stock market because

they would have had difficulty detecting the return,

risk and liquidity of the company's stock is traded.

Therefore it becomes very important to make

efficient capital markets, efficient capital market can

be created with a lot of competition among

investment analysis for investment analysis leads to

a situation where at any time, the stock price

indicates that the actual value. The more the number

of financial analysts and the competition between

them will make the price of the securities fair and

reflect all the relevant information in which the

analyst will attempt where the analyst will attempt to

obtain as comprehensive information as possible

compared to other analysts with the closest possible

analysis that will make the price of the securities fair

or in other words, the stock prices reflect all

available information and make adjustments to fully

and rapidly to new information (Husnand, 2005).

128

Rahimah, E., Maipita, I. and Fajar Ayu, S.

Analysis Weak Form Efﬁciency in Indonesia Stock Exchange Period 2011-2016.

DOI: 10.5220/0009898800002480

In Proceedings of the International Conference on Natural Resources and Sustainable Development (ICNRSD 2018), pages 128-132

ISBN: 978-989-758-543-2

The idea of testing the efficiency of the market

as the information contained in efficient market

hypothesis. Fama divides the efficient market

hypothesis into three categories: first, the strong

form market efficiency hypothesis is to answer the

question of whether investors have private

information that is not reflected in the price of

securities. Second, the semi strong form efficiency

market hypothesis is how quickly the price of a

security reflects the published information. Third,

the weak form efficiency market hypothesis is how

strongly historical information can predict future

returns. This hypothesis is known as Random Walk

Hypothesis (RWH) states that the current price of

securities fully reflects the information contained in

the historical price. Therefore, the best predictor of

future prices is the current price. It is not possible for

investors to design profitable strategies based on the

prices of securities in the past. The capital market

will be more efficient in a weak form if the

prediction rate is lower, so the current stock market

price is independent of the stock market prices in the

past. In other words, the efficient market forms weak

if the stock price follows a random walk process. To

test the efficiency of weak form, it is necessary to do

random walk hypothesis (RWH) test considering the

relation between current and past stock price

(Fawson. et.al, 1996; Ananzeh, 2016; Arora, 2013;

Okpara, 2010; Borges, 2010; Shaker, 2013)

From three forms of testing efficiency in the

information market, the discussion in this study

focused on the weak form market efficiency testing

or return predictability test, because most of the

research in the market efficiency hypothesis (EMH)

focuses on the weak form level, because if the

research results do not support weak form market

efficiency, testing at the next level is useless

(Gimba, 2010; Ikechukwu, 2015; Phan & Zhou,

2014). The Indonesian capital market is a capital

market that was established since the Dutch

occupation in Indonesia under the name Vereniging

Voor de Effekteenhundel in 1912 in Batavia with the

aim of raising funds to support the expansion of the

Dutch Colonial plantation business. But it stopped

when World War I and II happened and was

reactivated in 1977 and a few years later the capital

market experienced growth. Indonesian capital

market over the last 5 years have improved

performance. This is reflected in the JCI, which is

shown in Figure 1.

Figure 1. JCI Developments for the Last 5 Years

In theory emerging countries tend to be

inefficient. Claessens et al believe that there are

several motivations behind attempting to test

efficiency in emerging countries (Claessens et al,

1993). First, domestic and foreign investors do not

really like to invest in the stock market in emerging

countries because there are inefficiencies. For

example, the thin market in Africa is often

considered the subject of insider manipulation and

consequently makes foreign investors lose

[Magnusson and Wydick, 2002). If the inefficiency

of the market continues to the stage only individuals

or certain companies are entitled to exclusive

information or insider trading, certainly not

encouraging domestic and foreign investors to

approach the market. Second, the efficiency test is

trying to give an assessment of the effectiveness of

the role played by the market, as an example of a

role in asset allocation.

2 METHODOLOGY

The type of research used in this study is

explanatory research. In this study the researchers

tested a theory that has been tested empirically by

previous researchers. In this context, the variables

tested related to the weekly stock price movement of

the period January 1, 2011 to December 31, 2016.

The data used in this study is the weekly data from

the stock exchange LQ45 index from January 2011

until December 2016. The sampling technique was

4316,69

4274,18

5226,95

4593,01

5296,71

5949,7

1000

2000

3000

4000

5000

6000

7000

2012 2013 2014 2015 2016 2017

IHSG

Analysis Weak Form Efﬁciency in Indonesia Stock Exchange Period 2011-2016

129

conducted by purposive sampling method are taken

based on certain criteria, that are:

1. Number of issuers listed in the LQ 45 Index.

2. Issuers are not consistently listed in the LQ 45

Index during the year 2011-2016

3. Issuers incomplete publish weekly stock price

LQ 45 Index during the year 2011-2016

Based on the criteria established, then obtained

34 sample data with the number of observations is

8160 obtained from 34 x 240 (multiplication of the

number of samples with the study period ie weekly

during the year 2011-2016). The main variable in

this study is a weekly return of stocks from 34

companies listed in the LQ-45 for the period January

2011 to December 2016, by formula:

















 100

(1)

Data analysis method used in this research are:

1. Non parametric test

non parametrik test in this study is runs test.

With the following equation:

𝜇











∑













(2)

𝑍

,





 (3)

Description:

N = total number of observations

= the number of price changes (returns) in

each category

Z= standard normal Z-statistics

r = number of actual runs;

µ = number expectations of runs,

Hypothesis testing criteria:

: market is weak form efficiency

: market is not weak form efficiency

If the Z-statistic is less than 1% and 𝜌 value

also less than 5% level of significance, then we

reject the null hypothesis which mean market is not

weak form efficiency.

2. Parametric test

Non parametric test in this study is unit root test.

With the following equation:

∆𝑌



= αβ



γY



 𝛿



∆𝑌



+ 𝛿



∆𝑌



𝜀



(4)

Keterangan:

α = constants

β  coefficient of 𝑡𝑖𝑚𝑒 𝑡𝑟𝑒𝑛𝑑

𝛿parameter

𝜌 = lag order of the autoregressive process

∆Y = First Difference series of Y

ε = error term

Hypothesis testing criteria:

: stock returns are random

: stock returns are not random

If the value of ADF Statistics greater than 1%,

5% & 10% critical value and 𝜌 value greater than

5% then we accept the null hypothesis which mean

stock returns are random (market is weak form

efficiency).

3 EMPIRICAL RESULT

In data analysis method used in this research are

testing the weak form efficiency on the Indonesia

Stock Exchange, this study uses non-parametric test

that is runs test and parametric test that is unit root

test.

1. Runs test

Runs test is a non parametric test for serial

dependence in stock return, designed to test whether

the sequence observations are random or not.

Table 1. Result Runs Test

Series Z Asymp. Sig.

(2-tailed)

AALI

-14.953 .000

ADHI

-16.323 .000

ADRO

-16.665 .000

AKRA

-14.953 .000

ASII

-13.812 .000

ASRI

-15.523 .000

BBCA

-16.551 .000

BBNI

-15.410 .000

BBRI

-16.780 .000

BMRI

-14.953 .000

BMTR

-16.894 .000

BSDE

-14.268 .000

GGRM

-14.268 .000

ICBP

-16.323 .000

INCO

-14.382 .000

INDF

-15.638 .000

INTP

-15.296 .000

JSMR

-14.837 .000

ICNRSD 2018 - International Conference on Natural Resources and Sustainable Development

130

KLBF

-14.953 .000

LPKR

-13.926 .000

LPPF

-16.690 .000

LSIP

-14.725 .000

MNCN

-15.980 .000

PGAS

-16.095 .000

PTBA

-15.410 .000

PTPP

-17.008 .000

PWON

-15.638 .000

SCMA

-15.638 .000

SMGR

-16.209 .000

SMRA -15.866 .000

TLKM -15.866 .000

UNTR -14.382 .000

UNVR -15.182 .000

WIKA -16.780 .000

Based on table 1 it shows that the output results,

both individually and overall shows that Z-statistic

less than 1% and 𝜌 value also less than 5% level of

significance, then we reject the null hypothesis which

mean the market is not weak form efficiency.

2. Unit Root Test

This test is used to see whether the time series data

being analyzed is stationary (not random) or not

stationary (random).

Table 2. Result Unit Root Test

Series ADF

Statistik

Critical

Value at the

1%, 5% &

10%

Prob

AALI -10.97379 -3.451775 0.000

-2.870868

-2.571811

ADHI -

16.61084

-2.870774 0.0000

-2.571761

-3.451561

ADRO -

17.68819

-2.870774 0.0000

-2.571761

-3.452596

AKRA -

6.060512

-2.871229 0.0000

-2.572004

-3.451561

ASII -

22.08080

-2.870774 0.0000

-2.571761

-3.452215

ASRI -

4.165988

-2.871061 0.0009

-2.571915

-3.451993

BBCA -

7.713222

-2.870964 0.0000

-2.571862

-3.452366

BBNI -

5.838164

-2.871128 0.0000

-2.571950

-3.451993

BBRI -

7.174130

-2.870964 0.0000

-2.571862

-3.451561

BMRI -

20.27418

-2.870774 0.0000

-2.571761

-3.452290

BMTR -

5.007195

-2.871095 0.0000

-2.571932

-3.451561

BSDE -

19.95540

-2.870774 0.0000

-2.571761

-3451561

GGRM -

21.57793

-2.870774

0.0000

-2.571761

-3451775

Based on table 2 it shows that the output

results, both individually and overall shows that

ADF-statistic (tα) less than critical value at the 1%,

5% & 10% level of significance and 𝜌 value also

less than 5% level of significance, then we reject the

null hypothesis, this gives the same conclusion to the

previous test is the market is not weak form

efficiency.

4 CONCLUSIONS

The result of this study shows that the testing of

weak form efficiency market on Indonesia Stock

Exchange (BEI) during the period of January 2011

to December 2016 by using non parametric test is

runs test and parametric test is unit root test, jointly

reject the null hypothesis or in other word BEI is not

random walk or inefficient in weak form, this shows

that the information infrastructure in Indonesia is not

yet fully available and investors still lack knowledge

about how to invest properly.

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