Investors’ risk perception in the context of efficient market hypothesis: A conceptual framework for malaysian and indonesian stock exchange

Abstract

The advocates of the Efficient Market Hypothesis (EMH) theory postulates that share prices depict all the available information concerning its intrinsic worth. EMH espouses the Random Walk Theory i.e. future stock returns cannot be predicted based on past movement patterns. Contrary to that, there are believers of the Adaptive Market Hypothesis (AMH) who have questioned the adaptability of EMH and argues that market efficiency and investor’s risk perception varies across time, thus, stock returns can be predicted through active portfolio management. Various Studies have argued on market efficiency debate for developed markets, however, limited studies have examined the same for emerging markets such as Malaysia and Indonesia, which are most volatile among ASEAN-5 indices. Therefore, the primary objective of this study is to conceptualize the manifestation of efficient market hypothesis and investors’ risk perception in volatile markets of Malaysia (Kuala Lumpur Composite Index) and Indonesia (Jakarta Composite Index) by testing the 10 years (2010-2019) of daily, weekly and monthly data for the return predictability. The findings of this study will provide insight into stock market behavior to help investors to better strategize their portfolio investment positioning to reap the most efficient risk-based return.