Risk factors in the Indonesian stock market

Abstract

This paper identifies the relevant risk factors that determine the cross-section of returns in the Indonesian stock market. We examine 152 factors using the Bayesian framework developed in Jensen et al. (2022). Our results show that size, value, quality, and profitability are the characteristics themes that explain future cross-sectional stock returns during the period 1991–2022. Momentum is not significant. We document differences in factor returns for stocks that adhere to Sharia law (i.e. Islamic finance principles). Value and size return patterns occur across all stocks, but significant posterior alphas for quality and profitability reliably exist only within non-Sharia stocks.