Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/328672 
Year of Publication: 
2023
Citation: 
[Journal:] Economies [ISSN:] 2227-7099 [Volume:] 11 [Issue:] 2 [Article No.:] 46 [Year:] 2023 [Pages:] 1-24
Publisher: 
MDPI, Basel
Abstract: 
According to portfolio theory, diversifying investment to several stocks with negative correlations may reduce portfolio risk. In contrast, combining stocks with similar movement (co-movement) has no impact on portfolio risk reduction. This study aims to examine state-owned enterprise stock co-movement in Indonesia using orthogonal generalized auto-regressive conditional heteroscedasticity (O-GARCH) to help investors selectively choose stocks in a portfolio to reduce portfolio risks. Saturation sampling was used since all state-owned enterprise stocks listed on the Indonesian Stock Exchange were selected as samples. Based on monthly data from January 2013 to December 2021, the O-GARCH method was able to simplify the covariance matrix of the 17 SOEs. Of 17 SOEs, 11 had co-movement, as indicated by their similar principal components, whereas the remaining 6 stocks had a different principal component. Hence, investment managers or investors should not put the eleven stocks in the same portfolio as they have similar risk factors; instead, they may combine them with the six remaining SOE stocks which have a different co-movement. In addition, when the fiscal deficit is high and unconventional monetary policy is implemented in a crisis period, the SOE stock co-movement is higher. Thus, the SOE stock co-movement also depends on government-related matters and faces slightly different risks compared to its private-sector counterparts. Hence, the regulators formulating the policy on SOE stock holdings may use the results of this study by considering the potential merging of the SOE stocks with a similar stock return co-movement by taking account the timing in relation to fiscal deficit and crisis period.
Subjects: 
orthogonal GARCH
principal component analysis
state-owned enterprises
stock returns
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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