Is there a short-term overreaction to pandemic COVID-19? A case study of the Indonesia Islamic Capital Market

Abstract

COVID-19 is an event that has harmed various sectors, one of which is the capital market sector. The high uncertainty caused by the COVID-19 outbreak caused investors to react to this event, which could cause an overreaction phenomenon. The events taken in this study sample are two events related to COVID-19. This study aims to analyze the phenomenon of overreaction in Islamic stocks and the factors that influence the phenomenon of overreaction by using the two-sample difference test method and cross-sectional regression. The results showed that in the lockdown event (Event 2) was proven that there was a significant overreaction phenomenon in the winner stock category. The factors that influence the overreaction phenomenon in this event are proven to be significantly and negatively influenced by leverage and market capitalization. In contrast, trading volume significantly and positively influenced the overreaction phenomenon.

Firm Size, Market Risk, And Return Reversal Anomalies During The COVID-19 Pandemic

“…This supports previous findings, which stated that the benefits of implementing a contrarian investment strategy in return reversal events tended to be obtained in the short term. These results also support the findings of (Piccoli et al, 2017), (Reddy et al, 2020), (Sembiring, 2022), and (Syafitri et al, 2022).…”

“…The advantage of applying the contrarian strategy is the positive difference between loser and winner returns. Several empirical studies have proven that market overreaction events which are characterized by the occurrence of return reversal anomalies, also occur in Indonesia, as found by (Meiliani et al, 2021) (Sembiring, 2022) and (Syafitri et al, 2022), as well as in several other emerging markets, such as in Shanghai (Reddy et al, 2020) and in Ho Chi Minh Stock Exchange or HOSE (Truong et al, 2023). Firm size and market risk.…”

“…The results of research by (Sembiring, 2022) and (Syafitri et al, 2022) found advantages of implementing the contrarian investment strategy in the Indonesian market (Indonesia Stock Exchange) in the short term. However, (Hadimas, 2019) did not find the advantages of the strategy through the research results since previously, occurred of the overreaction phenomenon was found insignificant statistically.…”