Accounting and Finance

The Efficient Market Hypothesis in Developing Countries: Indonesia

Article Number: ASE204548 Volume 01 | Issue 01 | May - 2018 ISSN: UA
07th Jan, 2018
10th Apr, 2018
15th May, 2018
18th May, 2018


Arjeta Hallunovi


By considering all the historical and developmental background of the efficiency market hypothesis, in this paper it will be a quick review on the evidence of the rejection of the hypothesis based on previously done studies and based on own investigations. The main object of the paper is about the determinations done on stock prices. It is thought that a high quality predictability of the stock prices has a huge role in the security market and in the whole macroeconomic policies of a country. The efficiency and predictability adjusted by the efficiency market hypotheses are violated in stock market, by emphasizing the fact that the future stock prices and returns are not estimated completely by the previous years’ data. In this paper, it is tried to find out other models done for returns and prices securities in Indonesia to prove the rejection of the hypothesis, that in fact it is implicated also in some other developing countries. The model of the stock prices and the other estimators by using the root test examine the weak form of the efficiency market hypothesis and confirm the rejection of the hypothesis. By the help of the Augmented Dickey-Fuller test and the Granger test of causality, it can be understood that market efficiency cannot be fully predictable and understandable, because it is a matter of the economic behavior. Key Words: Augmented Dickey Fuller Test, Efficient Market Hypothesis, Indonesia, Stock Markets


The developing economies recently are surpassing huge economical, institutional, social and political changes. Economic growth is related especially with capital flows, trade and financial market expansions. All the market participants are working out together to try to construct an international capital market economy where their emerging market can integrate in the world economical activities. Behavior of the stock prices and also the fluctuations on exchange rate give the trace to the investors to have some information about the market. This is the point where Fama (1970) developed the idea of the Capital Market Efficiency which relies on the utilization of the information available for the rational expectations. The efficiency of the market is supposed to be completed whenever the whole market shares all the information which is needed to predict the future background for the newly investments. He derived this idea in an empirical evidence of the relationship between the forward rate and the spot rate into an operational form where the forward rate is thought to be equal to the expected spot rate and the risk premium of the issued security. Due to this idea other empirical researches are done especially on stock markets to show the effect of prices behavior on publicly available information. The hypothesis is assumed to be a joint one since it is believed that the agents that are expecting the evaluation of the prices in the next period are rational in the meaning that they do make no systematic forecasting errors and they have sufficient information to know the expected market price equilibrium and equilibrium returns. The prices of the assets are said to be a random walk variable. The availability of the information and the rationality of the agents divide the hypothesis into three forms: weak, semi-strong and strong efficient forms (Lo and MacKinlay, 1988). This classification is done to emphasize the point where the hypothesis is break down, which is the point that the market has potential information to be reflected into the securities’ prices. Most of the studies done previously have been tested due to the first two forms of the hypotheses because the distribution of the private information is so difficult and privately saved and there it is thought that the share of information is costless and the market ought to be perfectly competitive so that the prices gain all the possibility to capture freely all the market information. An interested characteristic that caught my attention (being one of the reasons why it is choose Indonesia as an example in this paper) is that there exist three stock markets: Jakarta, Surabaya and Indonesia Stock market. Each of them seeks to pursue efficient strategies for investors and other financial agents in order to offer to the market a profitable and secure environment. Due to the economic factors it is difficult to have a fully behavioral and efficient stock market. Government is trying to find efficient policies to be implemented into the economy in order that the participants can access to the target aims. The Jakarta Stock Market is becoming one of the most performed markets in the asian continent. Although the markets are emerging towards financial globalization, there are still some mismatches between the structural changes of the market and the behavior of the people despite that they have three different markets for carrying their preferences from one market to another. But again there are a lot of structural risks, that associate the companies that invest in the market such as credit risk, liquidity risk, market risk, exchange rate risks etc.. There are real improvements in the stock market that outperform the investors’ environment, as improvements in the confidence of the business cycle and in the investors. The Jakarta Market tries to supply to the public the needed amount of the stocks in order that they can try to achieve the required profits. It performs micro and macro economic conditions so that the seller and the buyers of the securities can interact easily with each other. The domestic environment of the capital market, especially the political conditions, it has negatively effects in the global liberalization of the stock market. In mostly developing countries the efficiency market hypothesis is rejected.


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How to cite this article?

APA StyleHallunovi, A. (2018). The Efficient Market Hypothesis in Developing Countries: Indonesia. Academic Journal of Accounting and Finance, 1(1), 1-6.
Chicago Style
MLA Style

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