How Dovish Policy Reshaped Market Efficiency: Firm-Level Evidence from Indonesia

Novi Swandari Budiarso; Winston Pontoh

doi:10.17323/j.jcfr.2073-0438.19.4.2025.78-87

Novi Swandari Budiarso Sam Ratulangi University, Manado, Indonesia https://orcid.org/0000-0002-5832-0117
Winston Pontoh Sam Ratulangi University, Manado, Indonesia https://orcid.org/0000-0003-3123-7919

DOI: https://doi.org/10.17323/j.jcfr.2073-0438.19.4.2025.78-87

Keywords: EMH, weak-form, interest rate, capitalization, illiquidity, risk, return

Abstract

The shift toward a dovish monetary stance in Indonesia in early 2025 provides a valuable context for examining stock market efficiency under the weak form of the Efficient Market Hypothesis (EMH). This study investigates market efficiency during the transition in monetary policy by integrating firm size, liquidity, and abnormal returns as analytical dimensions. Using variance ratio (VR) tests with lags 2, 4, 6, and 8, the study evaluates 665 listed firms from October 9, 2024, to April 30, 2025. The findings show that while most portfolios exhibited significant VR values under hawkish conditions, these values became insignificant during the dovish period, indicating improved efficiency. Nevertheless, certain portfolios – particularly BLH, SIH, and SLH – continued to generate abnormal returns, reflecting anomalies within the EMH framework. Moreover, liquid small-cap portfolios with high abnormal returns displayed superior risk-adjusted performance, suggesting that monetary easing under conditions of stable inflation and strong economic growth, enhances investor
sentiment and market participation. This study contributes empirical evidence to the EMH literature by demonstrating how monetary policy interacts with firm size and liquidity in shaping return dynamics. However, the focus on the Indonesian capital market over a limited timeframe constrains the generalizability of the findings to broader market contexts and longer periods.

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