Max-Effect in the Indonesian Market

Research Question: Following the well-documented MAX-effect anomaly in different markets, we inquire whether the MAX-effect occurs in the Indonesian market. Motivation: The MAX-effect is the following month negative return when investors long the highest decile portfolio and short the lowest decile portfolio. The decile portfolios are sorted and created based on the stocks highest previous month daily return (Alkan and Guner, 2018; Bali, et al., 2011; Seif et al., 2018). The anomaly has been documented in different countries and regions, such as Australia (Zhong and Gray, 2016), Turkey (Alkan and Guner, 2018), and European countries (Walkshäusl, 2014). We conduct this study because the Indonesian market has different features from other markets, namely the relatively low proportion of the retail investors in comparison to the whole population and the limit to short-sell stocks. Idea: Based on the extant literature, if the MAX-effect is robust, we deduce that the MAX-effect will exist in the Indonesian market. Data: We create ten portfolios sorted on the maximum previous month's daily return (MAX) using the Indonesian market data from July 2013 till June 2018. Method/Tools: Our study utilizes descriptive statistics, Fama French Three-Factor Model, and Fama-Macbeth regressions. Findings: Our portfolio analysis suggests that a combination of long (short) position in high (low) MAX decile stocks will generate a raw return and a risk-adjusted (Fama-French Three-Factor) return of -1.6% per month. Also, our stock level analysis shows that MAX and market capitalization (SIZE) are negatively associated with the subsequent monthly stock return. In contrast, stock market beta (BETA) and book-to-market ratio (BM) do not significantly influence the subsequent monthly return. Contributions: Although the Indonesian market has different features, our study corroborates the existence of MAX-effects in different markets. We also find that the previous month MAX positively affects the current month MAX, indicating some investors' preference for lottery-type stocks.