Understanding capital market responses to government economic policy announcements: An event study on Indonesia’s Economic Policy Package

Abstract

This paper investigates the changes in stock market returns before and after the announcement of a sample of three instalments, or ‘volumes’, (I, X, and XVI) of the Indonesian government’s Economic Policy Package (EPP), between 2015 and 2017. It tracks Abnormal Return (AR) and Cumulative Abnormal Return (CAR) on the Composite Stock Price Index (JCI) and ten sectorial indices of the Indonesia Stock Exchange. By testing for the direction and significance of differences in AR and CAR, the paper aims to clarify whether those announcements provided sufficient informational content to sway prices. The study finds that the impact of the policy announcements was recorded primarily by individual sectors, but did not elicit a significant market-wide response. Moreover, the majority of economic sectors consistently reacted negatively. This shows that, overall, capital markets did not feel those government policies contain sufficient measures to remove obstacles to business activity.