How the Indonesia Stock Exchange Reacts to Information: A Speed of Adjustment Coefficients Study

Abstract

This study applies the ARMA model to estimate the speed of adjustment coefficients, as suggested by Theobald and Yallup (2004), in the IDX. There is not sufficient evidence to conclude that the IDX overreacts to information. However, the findings suggest that the market either underreacts or fully adjusts to information. The IDX displays significant underreactions at weekly intervals that occur after the full adjustment. Investors' reaction is not sensitive to the size and liquidity of the indices. Size alone could not provide sufficient explanation for the different adjustment pattern across sector indices.

Keywords: speed of adjustment, underreaction, overreaction, emerging markets, market efficiency