The idiosyncratic risk during the Covid-19 pandemic in Indonesia

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Conservatism in the CAPM and L-CAPM standards often emphasizes systematic risk to explain the phenomenon of the risk-return relationship and ignores idiosyncratic risk with the assumption that the risk can be diversified. The effect of the Covid-19 outbreak raises the question of whether the idiosyncratic risk can still be ignored considering that the risk has a close relationship to firm-specific risk. This study sets a portfolio consisting of 177 active public firms in the Indonesia Stock Exchange before and after the Covid-19 pandemic. On portfolio set, idiosyncratic risk is estimated by the standard CAPM and L-CAPM in the observation range from January 2, 2019, to June 30, 2021. The results of the analysis show that L-CAPM and CAPM produce significantly different idiosyncratic risks. Empirical evidence shows that the highest firm-specific risk is in the third period and has a stable condition since the fourth period. This condition is confirmed by regression results that idiosyncratic risk together with systematic risk positively affects stock returns in the fourth period as suggested by the efficient market hypothesis. Uniquely, both systematic risk and idiosyncratic risk based on L-CAPM do not show a significant effect on stock returns in the fifth period, so it is a strong indication that liquidity is an important factor that must be considered in making investments.

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    • Table 1. Mean difference test of idiosyncratic risk (for each model)
    • Table 2. Mean difference test of idiosyncratic risk (for each period)
    • Table 3. Logistic regression test
    • Conceptualization
      Winston Pontoh
    • Funding acquisition
      Winston Pontoh
    • Project administration
      Winston Pontoh
    • Resources
      Winston Pontoh
    • Software
      Winston Pontoh
    • Supervision
      Winston Pontoh
    • Validation
      Winston Pontoh
    • Writing – review & editing
      Winston Pontoh
    • Data curation
      Novi Swandari Budiarso
    • Formal Analysis
      Novi Swandari Budiarso
    • Investigation
      Novi Swandari Budiarso
    • Methodology
      Novi Swandari Budiarso
    • Visualization
      Novi Swandari Budiarso
    • Writing – original draft
      Novi Swandari Budiarso