Abstract
This study conducted by gathering data from Indonesia Stock Exchange (IDX) with 2 specifics model, Capital Market Pricing Model (CAPM) and Fama French 3 Factors Model (FF3FM). These model was estimated by classify 557 stocks in Jakarta Composite Index (JCI) to 6 classes: S/L class is class with small size and low Book to Equity (BE) to Market Equity (ME), S/M class is class with small size and medium in BE/ME, S/H class is class with small size and high in BE/ME, otherwise B/L class is class with big size and low in BE/ME, B/M class is class with big size and medium in BE/ME, B/H class is class with big size and high in BE/ME. With F test, t test and classic assumption test, best class and best model were B/L class and FF3FM. The result was confirmed size factor and value factor in Indonesia Stock Exchange (IDX). Size factor are confirmed in 3 classes (S/M, S/H and B/L), and value factor are confirmed in 4 classes (S/M, S/H, B/L and B/H). Therefore, classes with size and value factor are S/M, S/H and B/L. With BE/ME is 1/PBV and PBV indicating the stock price relative to its book value, so in Indonesia Stock Exchange the size factor and value factor confirmed in market with small market capitalization with low to medium in stock price relative to its book value and market with big market capitalization with high stock price relative to its book value.
Highlights
After risk and return concept was developed by Markowitz (1952), the era of modern portfolio had just been started
This study has aim to prove the size factor and value factor in Indonesia Stock Exchange by comparing Capital Market Pricing Model (CAPM) and Fama French 3 Factors Model (FF3FM)
According to data gathered from Indonesia Stock Exchange (IDX), 290 stocks were selected from 557 stocks and 6 different classes, S/L class is class with small size and low Book to Equity (BE) to Market Equity (ME), S/M class is class with small size and medium in BE/ME, S/H class is class with small size and high in BE/ME, otherwise B/L class is class with big size and low in BE/ME, B/M class is class with big size and medium in BE/ME, B/H class is class with big size and high in BE/ME were formed
Summary
After risk and return concept was developed by Markowitz (1952), the era of modern portfolio had just been started. Research from Al-Afeef (2017) proved that CAPM could be applied in US market to predict return from 2009-2016 where 20% of expected return change was caused by beta and other 80% from other factors. Based on Lam (2005), said that 73.5% CFO in United States using CAPM to modeling risk and return, but CAPM left some misunderstanding and misleading towards some special cases. Fama and French (2004) was found some weakness in CAPM such as : 1) CAPM failed to explain some high and low beta cases, 2) CAPM was simple model that just explain risk and return, 3) CAPM was left huge error, proved by high Jensen’s alpha value in some special cases. Based on Lam (2005), said that 73.5% CFO in United States using CAPM to modeling risk and return, but CAPM left some misunderstanding and misleading towards some special cases. Fama and French (2004) was found some weakness in CAPM such as : 1) CAPM failed to explain some high and low beta cases, 2) CAPM was simple model that just explain risk and return, 3) CAPM was left huge error, proved by high Jensen’s alpha value in some special cases. Tanjung, Siregar, Sembel, & Nurmalina (2014) said that the Jakarta Composite Index (JCI) tend to move down after merger activity that affecting the JCI return and maybe lead to misfit in CAPM
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