THE EFFECT OF OVERREACTION IN FORMING PORTFOLIO IN CASE OF INDONESIAN STOCK MARKET AS YEAR OF 1992-2009 FINAL PROJECT
By Putu Agni Parahita 19007065
Undergraduate Program School of Business and Management Institut Teknologi Bandung
APPROVAL PAGE THE EFFECT OF OVERREACTION IN FORMING PORTFOLIO IN CASE OF INDONESIAN STOCK MARKET AS YEAR OF 1992-2009
By Putu Agni Parahita ID No: 19007065
Final Project
Undergraduate Program of Management Study School of Business and Management Institut Teknologi Bandung July 23, 2010 Approved By
Deddy P. Koesrindartoto, Ph.D NIP 132327713
THE EFFECT OF OVERREACTION IN FORMING PORTFOLIO IN CASE OF INDONESIAN STOCK MARKET AS YEAR OF 1992-2009 Putu Agni Parahita 19007065 Date of Final Presentation: August 3rd 2010 Date of Graduation: October 23rd 2010 Undergraduate Program, Institut Teknologi Bandung, 2010 Final Project Advisor: Deddy P. Koesrindartoto, Ph.D
ABSTRACT Capital market is one of the investment instruments that very attractive and volatile. The behavioral finance tendency of market that it is usually gives dramatically reaction to any news or information given that is called as the overreaction. Based on some researchers about overreaction, De Bondt and Thaler (1985), the investor commonly tends to overvalue the stocks that have frequently good performance (winner portfolio), in the other hand undervalue the stocks that have frequently poor performance (loser portfolio). This paper also presents the middle portfolio as the benchmark portfolio whether it performs similarly with the winner or the loser portfolio. Both market behavior and the investor’s psychology in behavioral finance tendency in investing on stocks are characterized as displaying overreaction. In which they tend to have a mindset that the winner will always win the market, moreover the loser portfolio. This paper will present the test of overreaction theory in market whether the loser portfolio is outperformed the winner portfolio or not. According to the Fama and De Bondt studies of Efficient Market Hypothesis theory, in order to test the overreaction in the market, the hypothesis testing is the expected return of winner portfolio by complete set of information would be less than zero and the loser portfolio’s return would be greater than zero. The cumulative abnormal return or residual return will also use in this paper since this paper recognize the return of the stock market that triggered by events. The paired t-test statistic will use as the tools to prove the hypothesis whether there is significant different among the average mean of return of the portfolios. This paper aim to reflect the tendency of Indonesian stock market that affected by the overreaction. The outperform performance of loser portfolio will reflect the reversal pattern that present the rebound of the loser portfolio, while the winner will fade back. This implies to a view of strategy to the investor, which is called contrarian strategy. The strategy of the contrarian strategy is found by using the overreaction prediction to invest in loser portfolio in certain period of time and avoiding the winner portfolio at that certain period of investment. But, as it is know that the security market follow the random walk of pattern, it still can not predicted what will happen in the future since there are many factors that affected the stock market. The results indicate that there is significant different among winner, middle and loser portfolio based on its average mean of return. It is also claimed that the investor mindset of the winner will always win is also failed. Keywords; overreaction, winner portfolio, loser portfolio.
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THE EFFECT OF OVERREACTION IN FORMING PORTFOLIO IN CASE OF INDONESIAN STOCK MARKET AS YEAR OF 1992-2009 Putu Agni Parahita 19007065 Date of Final Presentation: 3 Agustus 2010 Date of Graduation: 23 Oktober 2010 Undergraduate Program, Institut Teknologi Bandung, 2010 Final Project Advisor: Deddy P. Koesrindartoto, Ph.D
ABSTRAK Pasar modal merupakan salah satu instrumen investasi yang sangat menarik dan berubah-ubah. Kecenderungan perilaku pasar keuangan yang biasanya memberikan reaksi secara dramatis berita atau informasi yang diberikan yang disebut sebagai reaksi berlebihan (overreaction). Berdasarkan beberapa peneliti tentang reaksi berlebihan, De Bondt dan Thaler (1985), investor biasanya cenderung menilai terlalu tinggi saham yang sering memiliki kinerja yang baik (portofolio pemenang), di sisi lain meremehkan saham yang memiliki kinerja yang buruk (portofolio pecundang). Makalah ini juga menyajikan portofolio tengah, yaitu portofolio pembanding apakah cenderung memiliki kinerja yang sama dengan portofolio pemenang atau pecundang. Perilaku pasar dan psikologi investor dalam kecenderungan perilaku pada reaksi berlebihan. Di mana mereka cenderung memiliki pola pikir bahwa pemenang akan selalu memenangkan pasar, terlebih lagi lebih menang disbanding portofolio pecundang. Makalah ini akan menyajikan tes teori reaksi berlebihan di pasar apakah portofolio pecundang akan mengungguli portofolio pemenang atau tidak. Menurut Fama dan Bondt De studi Hipotesis tentang Efisien Pasar, untuk menguji reaksi berlebihan di pasar, pengujian hipotesis adalah pengembalian diharapkan dari portofolio pemenang oleh serangkaian informasi lengkap akan kurang dari nol dan pengembalian portofolio kalah itu akan lebih besar dari nol. Cumulative abnormal return atau residual return juga akan digunakan dalam makalah ini karena makalah ini keadaan pasar saham yang dipengaruhi oleh studi peristiwa. Paired t-test statistik akan digunakan sebagai alat untuk membuktikan hipotesis apakah terdapat perbedaan yang signifikan antara mean rata-rata pengembalian portofolio. Tulisan ini bertujuan untuk mencerminkan kecenderungan pasar saham Indonesia yang dipengaruhi oleh reaksi berlebihan. Kinerja portofolio pecundang akan mencerminkan pola pembalikan yang menyajikan lambungan portofolio pecundang, sementara pemenang akan berkinerja pudar terbalik. Hal ini berimplikasi pada pandangan strategi kepada investor, yang disebut strategi kontrarian. Strategi kontrarian ditemukan dengan menggunakan prediksi reaksi berlebihan untuk berinvestasi dalam portofolio pecundang dan menghindari portofolio pemenang pada periode tertentu investasi. Seperti yang diketahui bahwa pasar saham mengikuti pola random walk (berubah-ubah), masih tidak bisa diprediksi apa yang akan terjadi di masa depan karena ada banyak faktor yang mempengaruhi pasar saham. Hasil penelitian menunjukkan bahwa ada perbedaan yang signifikan antara portofolio pemenang, tengah dan pecundang berdasarkan mean rata-rata pengembalian. Hal ini juga mengklaim bahwa pola pikir investor, bahwa portofolio pemenang akan selalu menang juga gagal. Kata kunci : reaksi berlebihan, portofolio pemenang,, portfolio pecundang.
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FOREWORD First of all, I would like to thank to God, for the guidance and brighten my way so I can finish this final project report. This report that titled “The Effect of Overreaction in Forming Portfolio, in Case of Indonesian Stock Market As Year of 1992-2009” is a study to identify the effect of overreaction as a behavioral finance tendency of the investor in giving reaction to stocks related to news or information given that effected to the disvalue of the portfolio performance. This report is accomplished and may not possible without the very kind help and support from people and organization that mention below. The greatest thanks to: 1. Mr. Deddy P. Koesrindartoto, Ph.D as my academic counselor. Special thanks for his time, help, support, feedback and his guidance in doing this research. Also keep to remind and pushing me to complete this report. “You are the greatest academic counselor, Sir.” 2. The entire of SBM ITB lecturers who already gave precious knowledge in this past three years in SBM ITB. It is such a precious moment to be as a part of SBM ITB. 3. My family (Papa, Mama, Oma, Ngkong, and my sisters and brother) for their pray and spirit that encourages me to accomplish this report immediately and always cheering up my day. Also especially for Setraduta’s family that have been taken care of me for the past 3 years I stayed in Bandung. 4. Apastians family (tutor A) that makes me feels like having a second family with them. I am glad to have a family like Apastia. Hope that we’ll keep as one whole family and become a success people in the future. 5. Friends mate of Mr. Deddy’s academic supervisor group (Deddy’s Children), that always being friends to share and discuss with while accomplishing this final project. 6. My lovely friends, Raisa Aliyya Roseli, Alma E. Pattinasarany, Ratna Mutiarani, Kartika Anisa, Mega Pratiwi, Hazrati Ramadhany, Firra Astria Noezar, Nila Veronica, Rizani Imaniar, Kara Querida, Tiara Luciana Devi, Qisthia Katania, etc.
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that give me spirit and share togetherness due to this final project accomplishment and having so much fun in daily life. 7. IB Agung Indrawangsa that gives pray, patient and support to me in finishing this final project. 8. The entire friends of SBM-ITB 2010, who gives me the meaning of friendship and happiness trough 3 years studied in SBM ITB. 9. All the other parties, indirect parties that can not be mentioned one by one, also for elements in SBM-ITB to support and the kind help for my report accomplishment. I realize that this report still has many limitations and weaknesses, thus it needs more improvements and deeper observations. I apologize for any inconvenience during this report accomplishment.
Bandung, July 23, 2010 The writer
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LIST OF CONTENTS ABSTRACT ..………………………………………………………………………........... i ABSTRAK .....………………………………………………………………………......... ii FOREWORD ..………………………………………………………………………........ iii LIST OF CONTENTS ……………………………………………………………………. v LIST OF FIGURES ………………………………………………………………............ vii LIST OF EQUATION ……………………………………………………………........... viii LIST OF TABLES ………………………………………………………………….……. ix LIST OF APPENDIXES ………………………………………………………………….. x CHAPTER I INTRODUCTION ………………………………………………………….. 1 1.1 Background …….…………………………………………………………….... 1 1.2 Problem Identification ………….……………………………………………... 3 1.3 Objective …….……………………………..................………………………. 3 1.4 Problem Limitation ……………………………………………………………. 4 CHAPTER II LITERATURE REVIEW ……………………………………….................. 5 2.1 Efficient Market Hypothesis…………………................…………………….. 5 2.1.1 Weak-Form Tests: Patterns in Stock Returns ……………………… 6 2.1.2 Event Studies ……………………………………………………….. 7 2.1.3 Overreaction ………………………………………………………... 8 2.2 Empirical Studies …………………................………………………………... 9 CHAPTER III METHODOLOGY ……………...……………………………................. 13 CHAPTER IV DATA ANALYSIS ……………...……………………………................. 17 4.1 Data Collection and Data Processing…..………...…………………………… 17 4.2 Data Analysis …………………................………………………………........ 19 4.2.1 Portfolio of 1-year formation test period ……………………………21 4.2.2 Portfolio of 2-years Formation Test Period …………………………25 4.2.3 Portfolio of 3 years portfolio formation ……………………………. 28 4.3 The Tests ……………………………..........................……………………… 33 4.3.1 Hypothesis test for Means (Paired t-test) …..………...……………. 33 4.3.1.1 Paired T-Test Statistic for 1-year Portfolio Formation …………... 34 v
4.3.1.2 Paired T-Test Statistic for 2-yearsPortfolio Formation………….... 37 4.3.1.3 Paired T-Test Statistic for 3-years Portfolio Formation ………..... 39 CHAPTER V CONCLUSION AND RECOMMENDATION ..........……………….….. 43 5.1 Conclusion ……………………………............................................................. 43 5.2 Recommendation …………………………...................................................... 44 REFERENCES ………………………………………………………………………….... 45 APPENDIX ………………………………………………………………………............. 47
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LIST OF FIGURES Figure 3.1 Steps of the Methodology ……..………………................................................ 13 Figure 4.1 Cumulative Average Residual Returns on 1-year formation test period ........... 22 Figure 4.2 Cumulative Average Residual Return on 2 years portfolio formation ……….. 26 Figure 4.3 Cumulative Average Residual Return on 3 years portfolio formation ……….. 30 Figure 4.4 Two tailed t-test ………………………………………………………………. 34
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LIST OF EQUATION Equation 2.1 Efficient Market Hypothesis ………………………………………………….. 5 Equation 2.2 Abnormal Return ………………………………….………………………….. 7 Equation 2.3 Cumulative Abnormal Return ………………………………….…………….. 8 Equation 2.4 Overreaction Hypothesis …………………………………………………….. 8 Equation 4.1 Lower Quartile (Q1) …………………………….…………………………….. 18 Equation 4.2 Medium Quartile (Q2) ………………………….…………………………….. 18 Equation 4.3 Upper Quartile (Q3) …………………………….…………………………….. 18 Equation 4.4 Overreaction Testing for 1 year portfolio formation ………………………….. 19 Equation 4.5 Overreaction Testing based on ACAR………………………………………….. 19 Equation 4.6 Overreaction Testing (Difference between ACAR) …………………….…….. 19 Equation 4.7 Overreaction Testing for 2 years portfolio formation…………………….…….. 20 Equation 4.8 Overreaction Testing for 3 years portfolio formation…………………….…….. 20
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LIST OF TABLES Table 4.1 Cumulative Residual Return on 1 year portfolio formation. ..................
21
Table 4.2 Cumulative Residual Return of 2 year portfolio formation ……………
25
Table 4.3 Cumulative Average Residual Return on 3 years portfolio formation ...
29
Table 4.4 Descriptive Statistics of 1 year portfolio formation …………………...
34
Table 4.5 Paired Sample Test of 1 year portfolio formation …………………….
36
Table 4.6 Descriptive Statistics of 2 years portfolio formation …………………...
37
Table 4.7 Paired Sample Test of 2 years portfolio formation …………………….
38
Table 4.8 Descriptive Statistics of 3 years portfolio formation …………………...
39
Table 4.9 Paired Sample Test of 3 years portfolio formation …………………….
39
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LIST OF APPENDIX Appendix 1 T-Table Critical Value …………….………………………………………. 48 Appendix 2 Table Jakarta Composite Index (IHSG) period of 1992-2009…………..… 50
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