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Abstract
This study begins with the assumption that the existence of abnormal circumstances will force investors to take measures to protect their investments in the capital market. Recently, the stock index in the Indonesian market has been declining and continued to fall until the end of April 2020 due to the impact of the Covid-19 pandemic. In terms of efficient market theory, prospect theory and signaling theory, this study aims to analyze the relationship between risk and return in the Indonesian capital market during the Covid-19 pandemic as a manifestation of investor behavior. To test hypotheses, the correlation test, the independent sample t-test and the Cohen test for 629 public firms with 52,836 observable data are used. The findings show that for financial sectors and non-financial sectors, the fourth period differs from previous periods when the relationship between systematic risk and stock returns is positive, although only non-financial sectors have a significant effect. The results show that efficient market theory, prospect theory and signaling theory are consistent with the phenomena around the Covid-19 pandemic in Indonesia. In addition, Cohen’s test results suggest that government policies in the face of the pandemic are successful in stimulating the market.
Highlights
The ideal paradigm is that investors should consider risks and returns when developing a portfolio in order to make better investment decisions (Markowitz, 1952; Wolski, 2017; Stålnacke, 2019; Vo et al, 2019)
The results show that the negative relationship between stock returns and systematic risks is significant for financial sectors, but only for the third period
The results show that the relationships be- results show that stock returns of non-financial tween stock returns and systematic risks are con- sectors decline in the second period, but are higher sistently negative and significant for non-financial in the fourth period
Summary
The ideal paradigm is that investors should consider risks and returns when developing a portfolio in order to make better investment decisions (Markowitz, 1952; Wolski, 2017; Stålnacke, 2019; Vo et al, 2019). Under this assumption, investors face the risk of assets while setting up The utility function is the constraints of efficient the portfolio with optimum returns, which means market theory, especially in the concept of bethat the higher the expected return, the higher the havioral finance (Lintner, 1965; Fama, 1970). The behavior of rational investors will set in concave while selecting optimum portfolios, which Shubiri and Jamil (2018) confirm that idiosyncratmeans they are more averse to risk if anomalies ic risk is positively correlated with stock returns, exist On this point, Lintner (1965) shows that the while investors require performance improveanomalies in investors’investment decisions are a ments by firms. The hypothesis is prospect theory as the explanation for the phenomenon over the Covid-19 pandemic
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