UNAIR economists review mechanism of price discovery in Indonesian stock exchange

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Illustration by Feri Fenoria

UNAIR NEWS – With a growing economy, Indonesia is the 8th economic power in the world. UNAIR Economist Dr. Nisful Laila SE., M.Com., and team reviewed the “Mechanism of Stock Price Discovery in Indonesia”. According to her, in 2050 the Indonesian economy is expected to grow and develop to become the fourth economic power in the world, which is currently occupied by Japan. However, she added, the Indonesian stock market is currently known as a fragile stock market and is at the nascent stage of development.

Therefore, Nisful asserted that the Indonesian stock market or commonly referred to as the Indonesian Stock Exchange is a developing market and there is still limited research explaining the mechanism of price discovery. For this reason, she explained, the research was aimed at testing the mechanism of stock price discovery.

“In theory, the price of stock and risk are interconnected in the long run. It means that a stock price can affect the price of other stocks, ” she said.

This connection, continued Nisful, could trigger the discovery of a stock price mechanism. In essence, Nisful explained, if there are two stock markets moving together, both or one of them will correct the price equilibrium in the other stock markets. Furthermore, Nisful also said that the ability to predict prices is certainly very much needed by investors in determining their investment strategies. If price discovery can be determined, added Nisful, for example in the A stock market, then the market can be said to have informational content.

“This is because the stock market A has the potential to contribute to price discovery in, for example, the stock market B. Thus, the stock market A is a source of information, and investors can use the information content to predict stock prices on the stock market B. This is what is called the price discovery mechanism, ” she said.

In the end, Vice Dean III of FEB UNAIR also explained that the results of the research concluded that the price behavior in the Indonesian stock exchange was more influenced by the credit risk market. The implications of the findings, she said, had an impact on many policies.

“The regional and global credit risk factors have the potential to play an important role in influencing the risk of premium stocks in Indonesia,” she concluded.

Author: Nuri Hermawan

Editor: Khefti Al Mawalia

Reference:

https://www.sciencedirect.com/science/article/pii/S0264999319313008?via%3Dihub

Susan Sunila Sharmaa, Kannan Thuraisamya, Muhammad Madyan Nisful Laila. 2019. Evidence of price discovery on the Indonesian stock exchange.

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