Stock price synchronization among Indonesian state-owned enterprises

Abstract

According to portfolio theory, diversifying investments across stocks with negative correlations can effectively reduce portfolio risk. In contrast, combining stocks that exhibit similar movement (co-movement) offers limited diversification benefits. This study examines the co-movement of state-owned enterprise (SOE) stocks in Indonesia using the Orthogonal Generalized Autoregressive Conditional Heteroskedasticity (O-GARCH) method, with the objective of guiding investors in constructing portfolios that minimize risk. A saturation sampling technique was employed, including all SOE stocks listed on the Indonesia Stock Exchange. Using monthly data from January 2013 to December 2021, the O-GARCH model successfully simplified the covariance matrix of the 17 SOE stocks. The results revealed that 11 of the 17 stocks shared similar principal components, indicating strong co-movement, while the remaining 6 stocks exhibited distinct principal components. Consequently, investment managers and investors are advised not to include the 11 co-moving stocks in the same portfolio due to their shared risk factors. Instead, combining these with the six stocks that show different co-movement patterns may enhance diversification. Furthermore, the study found that SOE stock co-movement increases during periods of high fiscal deficit and the implementation of unconventional monetary policy, such as during economic crises. This indicates that SOE stock co-movement is influenced by government-related factors and thus carries risk characteristics that differ from those of private-sector stocks. These insights can also inform policymakers, suggesting that decisions regarding SOE stock holdings or potential mergers should account for co-movement patterns, especially during fiscal deficits and crisis periods.