The Hong Kong, Thailand, and Indonesia Capital Market Respons Toward the Brexit Phenomena

THE HONG KONG, THAILAND, AND INDONESIA CAPITAL MARKET RESPONS TOWARD THE “BREXIT” PHENOMENA

Tarsisius Renald Suganda

Kadek Ernawan

Gerrinko Giffari Wurintara

Faculty of Business and Economics Ma Chung University

Jl. Villa Puncak Tidar N-01 Malang, East Java, Indonesia

Abstract

Efficient Market Hypothesis (EMH) classifies the market into three forms, namely weak form, semi-strong form, and strong form market. This research is conducted to investigate the semi-strong form of the efficient market based on Brexit Phenomena on the three different countries. Hong Kong, Thailand and Indonesia are used as the subjects of the research. Event study is used to test whether the three-different-market are efficient in the semi-strong form, or giving any reaction toward the phenomena. The proxy of the market reaction in the research is Abnormal Return; and it is calculated using the market adjusted model. The data of HK50 Index, SET50 Index, and LQ45 Index are representing the three countries. The result of this research finds that there are no significant abnormal returns. The hypotheses in this research are rejected; and so, it means that the investors in Hong Kong, Thailand, and Indonesia have no response to the Brexit phenomena. This research proves that the capital market in the three countries is efficient in the semi strong form against the announcement of Brexit referendum result.

Keywords: efficient market hypothesis, event study, semi-strong form market, Brexit Phenomena, Hong Kong, Thailand, Indonesia Capital Market.

INTRODUCTION

Efficient Market Hypothesis is a concept which the prices established at the time is an overall reflection of existing information. The idea of the efficient market hypothesis developed by Eugene Fama (1970). Fama (1970) classified efficient market into three forms, namely weak form, semi-strong form, and strong form. In weak form, market stock prices fully reflected by information from the past. In the semi strong form market the security prices fully reflected all information published, including information residing on the financial statements of listed companies. In the strong form market, market is said to be efficient if security prices fully reflected all available information, including private information. All three forms of the efficient market classified by Fama (1970) has a different test form. One test that can be done is to use the event study to test the semi strong form market.

In an event study testing, to test whether the market is efficient in the form of semi-strong market, it needs an event that is considered important and reacted by market participants. One of the major events related to the capital market is Brexit phenomena from the European Union. Brexit stand for Britain Exit meaning Britain (England) out of the European Union. The European Union is an intergovernmental organization consisting of countries in Europe. After the Britain exit from the European Union on June 24 2016 this organization consists of 28 countries. Earlier, on June 23 2016 the British people voted to decided neither UK remain with the European Union or not. The voting results showed 52% of British people choose Brexit. There are many variety of reasons why UK out of the European Union.

The exit of UK from the European Union provides an enormous impact for countries in Europe and even countries in the world. Victory of Pro-Brexit eventually brought a big impact not only for the future of the UK, but also the European Union and even the western world (http://parstoday.com/). The real impact can be seen from this incident is the weakening of the pound sterling by 11% which is the lowest point in 30 years (http://ekbis.sindonews.com/). Another impact can also be seen in the England stock price index (FSTI 100) weakened enormously by 3:15% on Friday, 24.06.2016 (www.antaranews.com). Not only the UK stock exchange, Bursa Asia (MSCI Asia Pacific) weakened by 0.9% yatu on 28/06/2016. Not only the UK stock exchange, Bursa Asia (MSCI Asia Pacific index) also weakened by 0.9% on 28.06.2016.

These events are deemed appropriate for the study because the information of Brexit England gave the signal for investors to take investment decisions. This study using companies that listed on the index HK50 (Hong Kong Stock Exchange), SET50 index (Exchange of Thailand), and LQ45 (Indonesia Stock Exchange). Hong Kong exchange chosen as a research subject because of the stock market of Hong Kong is suspected as one of the indices with the best liquidity in Asia. In addition, the Hong Kong stock exchange has integration with Indonesia capital market. Halim & Mercories (2011) proved that the Indonesian stock exchange has a one-way relationship with Hong Kong stock exchange where increasing in IDX had positive effect on the increase in the Hang Seng. Thailand Stock Exchange chosen as a research subject because Thailand Stock Exchanged is one of the capital markets that have a strong correlation with the Indonesian stock exchange. Suganda & Soetrisno (2016) examine the effect of contagion integration and capital markets in ASEAN countries after the subprime mortgage crisis and Greek crisis. This research found that PSEI and SET has contagion effect to IHSG and vice versa. This study also used LQ45 index (Indonesia index). Under these conditions, the researchers study entitled this study “THE HONG KONG, THAILAND, AND INDONESIA CAPITAL MARKET RESPONS TOWARD THE “BREXIT” PHENOMENA”.

Based on the background that have been raise explained, the problem can be formulated as how did the stock market of Hong Kong, Thailand and Indonesia reacted to the announcement of the British Brexit from European Union in 2016 are reflected in abnormal return ?. This research is expected to provide empirical evidence about the events studied and contributing knowledge to investors or others in need, and to provide benefits to the academic, particularly related to the capital market.

Investment

According to Tandelilin (2010), investment is commitment of a number of funds or other resources that done today to obtaining number of advantages in the future. In general, investors undertake investment activities in order to gain more in the future. With greater profits in the future, it will prevent the investor from the risk of inflation and tax savings from investing in certain objects. Thus, investment activities increasing investor’s consumption potency in the future. Investment activities can be done through the capital market.

Capital Market

Capital markets is a place where variety of long-term financial instruments are traded. According to the Law of Capital Market No. 8 in 1995, the capital market is an activity concerned with the public offering and trading of securities, public companies relating to securities issuance, as well as institutions and professions related to the effect. The capital market is a bridge between the parties that have excess funds, to those who need funds. Issuers as the party who need funds issuing securities at the capital market to raise funds from the public. While investors as the party who have excess funds would purchase the securities issued at the capital markets to channel funds to the company.

Signaling Theory

Signaling Theory is an action taken by the company’s management that provide guidance to investors about how the management of a company's prospects look (Brgham & Houston, 2010). Signaling theory arising as an impact of information asymmetry in the concept of agency (Spence, 1973). The principals as the owners of capital, authorizes the agent to manage the company founded. However, in its development appears a conflict of interest between the principal and the agent. The agent as the market manager knew more information about the company's capacity and financial information compared to the principal. Therefore, when the agent providing information to outside parties, that information is considered as a signal for market participants.

Efficient Market Hypothesis

Fama (1970) argues that in an efficient market the price of a security is a reflection of all available and relevant information about those securities. So that in an efficient market, it is impossible for an investor to get abnormal return continuously. Fama (1970) presents three main forms of the efficient market based on the three different forms of information which is as follows:

1.  Weak form efficient market

A weak form market is said to be efficient if security prices fully reflect past information. Past information in question is information that has been happening. Weak form market efficiency related to the random walk theory which states that past data does not relate to the present value.

2.  Semi strong form efficient market

A semi strong form market is said to be an efficient if security prices fully reflect all information published including information in the financial statements. Published information can be as follows:

a.  The information published only affect company’s securities prices that publish such information.

b.  The information published affect some securities prices.

c.  The information published affect securities prices of all companies listed on the stock market.

In a semi-strong efficient market, there is no investor or group of investors who can use the information published for their own abnormal benefit in the long term.

3.  Strong form efficient market

A strong form market is said to be efficient if security prices fully reflect all available information, including private information. If the market is efficient in this form, then no individual investor or group of investors can make an abnormal profit because they have private information.

Testing of Semi Strong Form Efficient Market

Event study is a study of market reaction to an event that information is published as an announcement (Jogiyanto, 2013). In testing the semi strong form efficient market, basically the prior testing of information content must be done first, by seeing if the market responds to information published. The market's reaction is shown through the change in the price of the securities in question, which can be measured by looking at the presence or absence of abnormal return. Here is a matrix that describes the testing of information content (Jogiyanto, 2013).

Testing the content of an information done only to see whether or not the market reacts to the information. To see whether the efficient market in the form of semi strongor not, it is necessary to involved market reaction speed to absorb information. The market is said to be efficient in the semi strong form, if investors react quickly to absorb abnormal return and form a new equilibrium price. If investors react slowly, then the market is not efficient in the semi strong form. If the information does not cause abnormal return then the conclusion is the efficient market is unclear or cannot be answered.

Abnormal return

Event study is a study that analyzes whether there are abnormal returns on the time aroyund the announcement about the event. Abnormal return is the actual excess return above normal returns. According to Tandelilin (2010), the securities price in an efficient market should reflect information regarding the risk and return expectations in the future. Jogiyanto (2013) states that abnormal return is the excess of actual return against normal return. Normal return is return expectation (return expected by investors). Thus, it can be concluded that the abnormal return is the difference between the actual return and the return expected by investors whether it is positive or negative.

In an inefficient market, the securities will yield a larger return than normal, which is called the abnormal return. Brown & Warner (1985) estimated return expectation using the model estimation that is mean adjusted model, market model and market adjusted model. Among the three models, the market adjusted model is the model used in this study.

Mean-adjusted model

Market-adjusted model considers the best probe for estimating the return of a security is the market index at that time (Jogiyanto, 2013). Thus, when using a market-adjusted model does not needen any period estimation since the return of securities equal to the estimated market return. In the market-adjusted model abnormal return calculation is done by eliminating influence of the market on the daily return. Formula of market adjusted model are as follows.

ARi,t= Ri,t - Rm,t...... (1)

Keterangan:

ARi,t: Security abnormal return i on day t.

Ri,t: security return i on day t.

Rm,t: market return on day t

Britain discharge events from European Union actually has been an issue since March 2015 ago that started when campaign for British Prime Minister candidate. After the winner announcement of British General Election in May 2015 issues about the pros and cons on whether Britain will exit the European Union began emerging. On 20th February 2016, David Cameroon announced that he will hold a referendum about British Exit (Brexit) decision on June 23, 2016. Referendum about British Exit on June 24, 2016 showed that 52 percent of the British people opt to out from the European Union, while the remaining 48 percent choosing Britain remain within the European Union (Kompas.com, 2016).

Brexit issues that developed since 2015 so that market participants allegedly able to estimate the impact of it and will react to such events. Therefore, the appropriate abnormal return calculation model is market adjusted models, as market participants could be expected to be able to predict the impact so that the market return in the window period is the expected return of all market participants.

RESEARCH METHOD

Research Population and Sample

Population (Sugiyono, 2012), is a generalization region consisting of the object or subject that has special characteristics defined by researchers to drawn a conclusion. According to Arikunto (2010), sample is a fraction of sum and characteristics of selected population. Samples taken should represent the selected population.

The population in this study are all companies listed on Indonesian Stock Exchange (BEI), Hong Kong Stock Exchange and Thailand Stock Exchange. The sample in this study are all companies included in the LQ 45 index on the Indonesian Stock Exchange, Hang Seng Index (HK50) for Hong Kong Stock Exchange, and SET50 Index for Thailand Stock Exchange. The indices are selected because it’s consists of companies that have high levels of liquidity and have good condition. Samples were selected using purposive sampling method. Purposive sampling is done by taking a sample of a population based on a certain criteria. The used criteria based on considerations or specific allotments (Jogiyanto, 2011). The sample used in this study must meet the following criteria: