Is Indonesia's stock market different when it comes to predictability?

• Main Authors: Susan Sunila Sharma, -, Paresh Kumar Narayan, -, KannanThuraisamy, -, Nisful Laila, -
• Format: Article PeerReviewed
• Language: English; Indonesian; English
• Published: Elsevier 2019
• Subjects: H Social Sciences; HG1-9999 Finance; HG4551-4598 Stock exchanges
• Online Access: http://repository.unair.ac.id/96488/6/NisfulLaila_Karil05.pdf; http://repository.unair.ac.id/96488/2/Nisful%20Laila_Peer%20Review%20005.pdf; http://repository.unair.ac.id/96488/7/NisfulLaila_Similarity05.pdf; http://repository.unair.ac.id/96488/; https://www.sciencedirect.com/science/article/pii/S156601411930113X; https://doi.org/10.1016/j.ememar.2019.100623
• Institution: Universitas Airlangga

We construct a unique dataset consisting of 342 firms aimed at stock return predictability. Using seven predictors, we show that unlike in conventional markets, it is capital expenditure that is the most successful predictor of returns. However, the overall evidence of out-of-sample predictability when using other conventional return predictors is weak. Capital expenditure-based forecasting models do lead to profits also although these are small. This tends to imply that for markets that are at the nascent stages of development, such as Indonesia, capital expenditure might have a role to play in shaping the market. Our results are in sharp contrast to the literature on emerging markets.