CAPITAL ASSET PRICING MODEL IN MARKET OVERREACTION CONDITIONS: EVIDENCE FROM INDONESIA STOCK EXCHANGE

Market overreaction is a phenomenon in stock markets characterized by a return reversal on the stocks which resulted winners into a losers, vice versa, losers into a winners. While the CAPM is the model of asset pricing which puts the market risk factor as the sole determinant of return. The purpose of this study is testing whether market overreaction occurred in Indonesia stock market and whether Capital Asset Pricing Model (CAPM) can explain the portfolio return of the winners and the losers. This study uses the stocks of nonfinancial sector companies in Indonesia Stock Exchange during the period July 2005December 2015. Abnormal returns for each stock obtained by using a market model and the portfolio formed by using the method of 6-6 observation period. The results of this study are: (1) Market overreaction occurs in the Indonesia stock market characterized by a return reversal of the winners and the losers, and (2) CAPM which only considers the market risk factors in the model tend to be able to explain the portfolio return.