Jakarta Bomb and Investor Psychology

At least seven people killed and unknown injured in Indonesia capital attacks on Thursday. The attacks cause panic. Yes panic, not only in Sarinah central business district and Jakarta but also spread to investor in stock market. Jakarta Composite Index (JCI) opened in negative territory, along with international market. The U.S. Stock market slumped due to economic slowdown in China. DJIA, Nasdaq, and S&P 500 dropped by more than 2 percent yesterday.

Before we go over the specific, let’s take a more general look at stock movement on chart below.

Source: finance.yahoo.com

Source: finance.yahoo.com

The JCI eroded 0.7 percent to 4.492 at opening session. The Indonesia stock market continue declining reached 4.456 after bombing blasted at 10.40 a.m. Investor psychology shifted from unemotional, in which refer to capital market prices to equal the rational present value of expected future cash flows or in other word put fundamental analysis on top of standard approach to emotional investor that hard to be formulized by economic mathemathics model.

Investors’ attention move from China economic downtrend to herd behavior. Based on herd behavior in financial market: a review by Bikhchandani and Sharma stated investor tend to imitate others. They must be aware of and be influenced by others’ actions. Investor also can change their decision from not investing to making the investment or from not selling to selling their stocks anytime if they see most people to do so, whereas the financial company’ ratios had not changed. Briefly, investor rule out the role of fundamentals condition/ analysis at that moment. The JCI rebounded after Indonesia central bank announced an intereset rate cut by 25 basis point to 7.25 percent. Finally JCI closed at 4.513 higher than opening session which opened at 4.492.

To end up this, I remember what Baker and Wurgler (2007) written about investor sentiment in stock market. Real investors and markets are too complicated to be neatly summarized by a few selected biases and trading frictions. Centainly, both fundamental and investor’ psychology (behavioral finance) deserve continue research.

Palembang. January 15, 2016.

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