A Proposal Study on Indonesian Capital Market Integration with Cheung & Lee (1993): Asset Pricing Modification

Abstract

Proposal for this study is meant to analyze a capital market phenomenon in the Indonesian Stock Exchange who shows various results. Husnan and Pudjiastuti (1994), and Roida (2004) claim that Indonesia Capital Market tend to be segmented. They both claim that due to weak correlation between stock returns in the Indonesian Stock Exchanges (formerly Jakarta Stock Exchange) with stock returns in other countries’ Stock Exchanges, Indonesian Capital Market segmentation is justified. Their claims is further strengthened by Roll’s (1995) survey that not only claims that Indonesia market is segmented but also claims that Indonesian Stock Exchange is very attractive to foreign investors since this condition will bring the benefit of international diversification. Nevertheless, if further examined, the increase in foreign investor’s activity in the IDX would cause the Indonesian Index (IHSG) to be further influenced by the international factor carried by those foreign investors. This condition that causes the segmentation of Indonesia Capital Market started to be questioned. Furthermore, studies from Murtini and Ekawati (2003), and Surjawan (2007) discover the co-integration phenomenon in the IDX post 1997 monetary crisis. Next development is the occurrence of two major groups in capital market integration study (Yusof and Madjid, 2006). The first group is Statistical Perspectives who focuses on confirming the integration of capital market segmentation; while the other on seeking the determinants of capital market integration. On the second group, the writer finds that Cheung and Lee (1993) study has found ICAPM model and in for IDX will be modified with such determinant like as Net Foreign Fund Flow, 1997 Monetary Crisis & Volatility of stock returns. Thus, the purpose of the model’s modification is to cover four objects of problem on this study, those are: Pre-requisites of integration/segmentation; Determinants Factor, that is Net Foreign Fund Flow or generally called Net Buying Selling & Cost of Equity; 1997 Monetary Crisis; Volatility of stock returns