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Is Indonesia's stock market different when it comes to predictability?
journal contributionposted on 01.09.2019, 00:00 authored by Susan SharmaSusan Sharma, Paresh Narayan, Kannan ThuraisamyKannan Thuraisamy, N Laila
We construct a unique dataset consisting of 342 firms aimed at stock return predictability. Using seven predictors, we show that unlike in conventional markets, it is capital expenditure that is the most successful predictor of returns. However, the overall evidence of out-of-sample predictability when using other conventional return predictors is weak. Capital expenditure-based forecasting models do lead to profits also although these are small. This tends to imply that for markets that are at the nascent stages of development, such as Indonesia, capital expenditure might have a role to play in shaping the market. Our results are in sharp contrast to the literature on emerging markets.