Market dynamics before and after a recession announcement: Evidence from the banking sector

Abstract

This study examines the reaction of the Indonesian capital market, with a particular focus on the banking sector, to the official announcement of Indonesia’s economic recession on November 5, 2020, which followed the economic downturn triggered by the COVID-19 pandemic. The research investigates whether this macroeconomic announcement contained informational value that influenced investor behavior as reflected in abnormal returns and trading volume activity. Using an event study methodology, the analysis applies a market model with a 30-day estimation period and a 15-day event window to banking companies listed on the Indonesia Stock Exchange (IDX). The empirical results indicate no statistically significant differences in either abnormal returns or trading volume activity before and after the recession announcement. These findings suggest that the recession announcement did not generate a strong market reaction, implying that the information had been largely anticipated by investors and already incorporated into stock prices. This outcome is consistent with the semi-strong form of market efficiency (Jogiyanto, 2008; Yulianti et al., 2022). The study contributes to the literature on market efficiency and crisis-related event studies by providing empirical evidence from an emerging market, specifically Indonesia’s banking sector.