Analysis Of The Use Of Stock Price Crash Risk And Idiosyncratic Risk In Seeing The Effect Of Fama-frach And Investor Sentiment Models On Banking Stock Excess Returns In Indonesia
Analysis of the Effect of Fama-French Models and Investor Sentiment on Excess Return of Banking Stocks in Indonesia
Introduction
The world of stock investment is a complex and challenging environment, where investors face numerous risks that can impact their returns. Two of the most significant risks faced by investors are the risk of stock price crashes and idiosyncratic risks. These risks can have a significant impact on the returns of banking stocks in Indonesia, making it essential to understand the factors that influence these risks. This study aims to analyze the effect of the Fama-French model and investor sentiment on excess return of banking stocks in Indonesia, which has the risk of falling stock prices and non-systematic risks, both partially and simultaneously.
Background
The rapid development of the capital market in Indonesia has led to an increase in the number of investors, but also an increase in the number of losses suffered by investors due to lack of adequate capabilities and knowledge in assessing stock information. The Fama-French model is one of the tools used to understand the behavior of more in-depth stock returns by considering existing risks. This model includes factors that affect return, such as market risk, company size, and book-to-market ratios. Investor sentiment also plays a significant role in determining the return obtained from investment. Investor sentiment reflects market perceptions that are often influenced by psychological and emotional factors, which can cause stock prices to move not in line with the company's fundamental values.
Methodology
This study uses a quantitative descriptive research design, with a population covering 38 banks in Indonesia. Of these, 28 banking companies were selected through the purposive sampling method, based on the consistency of stock prices and trading volumes from the period 1 January 2014 to December 31, 2018. Furthermore, the shares were divided into eight portfolios based on the risk criteria for the fall in stock prices and idiosyncratic risks. The data used is secondary data accessed from Yahoo Finance and OK shares, with an analysis method using multiple linear regression.
Results
The results of this study showed that partially, market risk and book-to-market had a positive and significant influence on stocks with high and low stock prices, as well as high idiosyncratic risk. Conversely, size (size) has a significant negative effect on stocks with a high price of high prices and low idiosyncratic risk. In addition, investor sentiment is also proven to have a positive and significant influence on stocks with low price falling risk and idiosyncratic risk, both high and low. When viewed simultaneously, these variables (market risk, size, book-to-market, and investor sentiment) have a significant effect on excess returns that have the risk of falling prices and idiosyncratic risks.
The Importance of Fama-French Models and Investor Sentiments
The Fama-French model is one of the tools used to understand the behavior of more in-depth stock returns by considering existing risks. This model includes factors that affect return, such as market risk, company size, and book-to-market ratios. The results of this study indicate that market-to-to-market risks play an important role in predicting Excess Return, which is in line with existing theories.
On the other hand, investor sentiment also plays a significant role in determining the return obtained from investment. Investor sentiment reflects market perceptions that are often influenced by psychological and emotional factors, which can cause stock prices to move not in line with the company's fundamental values. This study found that investor sentiment had a greater impact on stocks with low price fall in price, showing that investors tend to be more optimistic when investing in more stable stocks.
Conclusion
This study provides important insights for investors and stakeholders in the Indonesian capital market, especially in terms of understanding the risks involved in investment in banking shares. By considering the Fama-French model and investor sentiment, investors can make better and informed investment decisions. Given the challenges faced in the stock market, it is essential for investors to continue to increase their knowledge and understanding of stock information, so as to reduce risk and maximize the potential return of the investment made.
Implications of the Study
The findings of this study have several implications for investors and stakeholders in the Indonesian capital market. Firstly, the study highlights the importance of considering the Fama-French model and investor sentiment when making investment decisions. By taking into account these factors, investors can make more informed decisions and reduce the risk of losses. Secondly, the study suggests that investors should be more cautious when investing in stocks with high idiosyncratic risk, as these stocks are more likely to experience price crashes. Finally, the study emphasizes the need for investors to continue to increase their knowledge and understanding of stock information, so as to reduce risk and maximize the potential return of the investment made.
Limitations of the Study
This study has several limitations that should be noted. Firstly, the study only focuses on banking stocks in Indonesia, and the findings may not be generalizable to other types of stocks or markets. Secondly, the study uses secondary data, which may not be as accurate or up-to-date as primary data. Finally, the study only considers a limited number of variables, and the findings may not be comprehensive or exhaustive.
Future Research Directions
This study provides several avenues for future research. Firstly, the study suggests that further research should be conducted to investigate the impact of other factors on excess return, such as macroeconomic variables or industry-specific factors. Secondly, the study highlights the need for further research on the role of investor sentiment in determining stock prices. Finally, the study emphasizes the need for further research on the development of more sophisticated models for predicting excess return, such as machine learning models or hybrid models.
Conclusion
In conclusion, this study provides important insights for investors and stakeholders in the Indonesian capital market, especially in terms of understanding the risks involved in investment in banking shares. By considering the Fama-French model and investor sentiment, investors can make better and informed investment decisions. Given the challenges faced in the stock market, it is essential for investors to continue to increase their knowledge and understanding of stock information, so as to reduce risk and maximize the potential return of the investment made.
Frequently Asked Questions (FAQs) about the Analysis of the Effect of Fama-French Models and Investor Sentiment on Excess Return of Banking Stocks in Indonesia
Q: What is the Fama-French model, and how does it relate to stock returns?
A: The Fama-French model is a financial model that was developed by Eugene Fama and Kenneth French to explain the behavior of stock returns. It takes into account three main factors that affect stock returns: market risk, company size, and book-to-market ratios. The model suggests that stocks with high market risk, small size, and high book-to-market ratios tend to have higher returns.
Q: What is investor sentiment, and how does it affect stock prices?
A: Investor sentiment refers to the emotions and attitudes of investors towards the stock market. It can be influenced by various factors, such as economic news, company performance, and market trends. Investor sentiment can cause stock prices to move not in line with the company's fundamental values, leading to overvaluation or undervaluation of stocks.
Q: How does the Fama-French model and investor sentiment affect excess return of banking stocks in Indonesia?
A: The study found that the Fama-French model and investor sentiment have a significant impact on excess return of banking stocks in Indonesia. The model suggests that stocks with high market risk, small size, and high book-to-market ratios tend to have higher returns. Investor sentiment also plays a significant role in determining the return obtained from investment, with investors tend to be more optimistic when investing in more stable stocks.
Q: What are the implications of this study for investors and stakeholders in the Indonesian capital market?
A: The study highlights the importance of considering the Fama-French model and investor sentiment when making investment decisions. By taking into account these factors, investors can make more informed decisions and reduce the risk of losses. The study also suggests that investors should be more cautious when investing in stocks with high idiosyncratic risk, as these stocks are more likely to experience price crashes.
Q: What are the limitations of this study, and what are the avenues for future research?
A: The study has several limitations, including the use of secondary data and the focus on banking stocks in Indonesia. The study suggests that further research should be conducted to investigate the impact of other factors on excess return, such as macroeconomic variables or industry-specific factors. The study also highlights the need for further research on the role of investor sentiment in determining stock prices and the development of more sophisticated models for predicting excess return.
Q: What are the key takeaways from this study for investors and stakeholders in the Indonesian capital market?
A: The study provides several key takeaways for investors and stakeholders in the Indonesian capital market. Firstly, the study highlights the importance of considering the Fama-French model and investor sentiment when making investment decisions. Secondly, the study suggests that investors should be more cautious when investing in stocks with high idiosyncratic risk. Finally, the study emphasizes the need for investors to continue to increase their knowledge and understanding of stock information, so as to reduce risk and maximize the potential return of the investment made.
Q: How can investors use the findings of this study to make more informed investment decisions?
A: Investors can use the findings of this study to make more informed investment decisions by considering the Fama-French model and investor sentiment. By taking into account these factors, investors can reduce the risk of losses and maximize the potential return of the investment made. Investors should also be more cautious when investing in stocks with high idiosyncratic risk and continue to increase their knowledge and understanding of stock information.
Q: What are the potential applications of this study in the field of finance and investment?
A: The study has several potential applications in the field of finance and investment. Firstly, the study can be used to develop more sophisticated models for predicting excess return, such as machine learning models or hybrid models. Secondly, the study can be used to investigate the impact of other factors on excess return, such as macroeconomic variables or industry-specific factors. Finally, the study can be used to develop more effective investment strategies that take into account the Fama-French model and investor sentiment.