Abstract
This study examined the response of stock prices on the Indonesia Stock Exchange (IDX) to COVID-19 using an event study approach and the GARCH model. The research sample is the closing price of the Composite Stock Price Index (JCI) and companies that are members of LQ-45 in the 40-day period before the COVID-19 incident, 1 day during the COVID-19 incident (March 2, 2020) and 10 days after, January 6, 2020 – March 16, 2020. Empirical findings prove that abnormal returns react negatively to COVID-19, JCI volatility fluctuates widely during the COVID-19 event, and the GARCH(1,2) model can be used to assess volatility and predict stock abnormal returns in IDX in market conditions infected with COVID-19. The practical implication of the study’s findings for investors is that the COVID-19 event caused stock price volatility, which affects abnormal returns. Therefore, to face the conditions of uncertainty and increased volatility in the future, several lines of risk management are needed in managing a stock portfolio. In addition, it also opens up opportunities for speculators to profit in an inefficient market environment. This study is based on the empirical literature currently being developed to investigate the phenomenon of stock price volatility behavior during COVID-19 on the IDX. The GARCH model used proves that during the COVID-19 pandemic, stock price volatility increases and leads to a decrease in abnormal returns. The empirical findings also validate the efficient market hypothesis theory related to the study of events and the theory of financial behavior related to uncertainty.
Highlights
The COVID-19 pandemic has infected many people, but has caused the world economy to go into recession
This study examined the response of stock prices on the Indonesia Stock Exchange (IDX) to COVID-19 using an event study approach and the GARCH model
Empirical findings prove that abnormal returns react negatively to COVID-19, JCI volatility fluctuates widely during the COVID-19 event, and the GARCH[1,2] model can be used to assess volatility and predict stock abnormal returns in IDX in market conditions infected with COVID-19
Summary
The COVID-19 pandemic has infected many people, but has caused the world economy to go into recession. This study uses the event study method to measure the impact before and during the COVID-19 pandemic in Indonesia on volatility and abnormal returns on the IDX using the GARCH model. The test results show that the propmovements decreased dramatically after the growth erty and real estate, construction, and financial secof positive cases infected with COVID-19 increased tors experienced a decline in abnormal returns (AR), during the pandemic. Judging from the COVID-19 cases, Khan et al (2020) proved negative cumulative abnormal return value, the sectors most returns on stock exchanges of 16 countries, while He affected are finance, trade, services, and investment. Stock market vol- TGARCH and GARCH-M standards, to test return atility tends to increase drastically if there are impor- volatility on the Malaysian and Singapore stock extant events that have a broad economic and financial changes. (2020) found that extreme asymmetric volatility is inversely related to stock returns
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