Overreaction and underreaction anomalies in the Indonesian stock market: a sectoral analysis

This purpose of this study is to empirically investigate the investors overreaction and underreaction behaviours across the sectoral stock indices in the Indonesian stock market.

Nine weekly sectoral stock indices, comprising agriculture; mining; basic industry and chemicals; miscellaneous industry; consumer goods industry; property and real estate; infrastructure, utilities and transportation; finance; and trade, service and investment for the period 2009-2012 were analysed using the paired dependent sample t-test. To provide more insightful empirical evidence, the presence of market anomaly of investor’s overreaction and underreaction was examined on five observations with different vulnerable times.

The study documented that the overreaction anomaly was present among the winner portfolios in the entire sectoral indices. With the exception of the sectoral index of basic industry and chemicals on the loser portfolio, the study documented the presence of underreaction anomaly among all other sectoral indices in Indonesia. These findings implied that the investors might be able to gain significant profits investing their monies in the sectoral stock market in Indonesia by implementing the contrarian strategy.

Originality in this paper lies in the discussion of overreaction of investors in Indonesia where the stock market has great potential and has different characteristics and different problems from other regions.