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Capital Market Efficiency Test with ARIMA Model: A Case Study of the Jakarta Stock Exchange's Composite Stock Price Index

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The purpose of this research is to analyze the level of the development of the capital market efficiency, particularly after the full implementation of the scriptless trading and book entry settlement at the Jakarta Stock Exchange for the period of January 2001 to September 2005. Capital market efficiency has been such an attractive research area in the global capital market because market efficiency propels the opportunity to make abnormal profits and at the same time the exposes investors to suffer abnormal losses. The capital market efficiency at the Jakarta Stock Exchange is an interesting phenomenon as the market has been characterized by a severe volatility particularly post Asian financial crisis. To improve the trading activities, the Jakarta Stock Exchange introduced and fully implemented the scriptless trading and book entry settlement in January 2001. This research especially examines the impact of the implementation of such a trading mechanism to the capital market efficiency development.nExisting literature have examined and showed that Indonesian capital market cannot be categorized as efficient capital market. However, the level of its development remains a question mark. For this purpose, this research takes the Composite Stock Price Index of the Jakarta Stock Exchange only into consideration during the period of study coverage.nUnivariate analysis is adopted in pursuing this study, particularly the use of the Autoregressive Integrated Moving Average (ARIMA) model. The Box-Jenkins ARIMA methodology is performed in this study as parametric test to measure the degree of dependency of the Jakarta Stock Exchange's Composite Stock Price Index time series data, and the runs test as non parametric test which does not require normality, is performed to test the independency between successive returns whether they are random or not. nThe empirical finding of this study demonstrates that after the full implementation of the scriptless trading and the book entry settlement, the Jakarta Stock Exchange is inefficient in the weak-form market during the period of January 2001 to September 2005. Such inefficiency allows regulators, market participants and potential investors to develop appropriate investment regulations and strategies which should look beyond short-term investment orientation.

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M00099

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Series Title

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Call Number

99

Publisher

: Swiss German University., 2006

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Language

English

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Subject(s)

MBA

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