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Stock market regulation and news dissemination: evidence from an emerging market

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  • Hisham Farag
  • Robert Cressy

Abstract

Stock market efficiency is associated with news being spread immediately in the market. The literature, however, offers two competing theories to explain this phenomenon. One theory, the mixture of distributions hypothesis (MDH) claims immediate dissemination, while the other, the sequential information arrival hypothesis (SIAH) argues for sequential dissemination, or effectively market inefficiency. The present paper provides a critical test of the two theories using emerging market data, specifically from Egypt, and finds evidence to validate both hypotheses, conditional on the regulatory regime (price limit versus circuit breaker). Using generalized method of moments estimation on 10 years of daily data on the EXG 30 market index, our results show that within the price limit window, news proxied by trading volume, spreads instantaneously to all market participants, consistently with the MDH. Within subsequent circuit breaker window, however, new information leaks out to all market participants only over a period of several days, consistently with the SIAH. We find this switch is moreover associated with an increase in price volatility. Thus, not only is the market less-efficient after the switch, it is also more volatile.

Suggested Citation

  • Hisham Farag & Robert Cressy, 2012. "Stock market regulation and news dissemination: evidence from an emerging market," The European Journal of Finance, Taylor & Francis Journals, vol. 18(3-4), pages 351-368, April.
    • Handle: RePEc:taf:eurjfi:v:18:y:2012:i:3-4:p:351-368
    DOI: 10.1080/1351847X.2011.579740
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    Cited by:

    1. Farag, Hisham, 2013. "Price limit bands, asymmetric volatility and stock market anomalies: Evidence from emerging markets," Global Finance Journal, Elsevier, vol. 24(1), pages 85-97.
    2. Román Alejandro Mendoza Urdiales & Andrés García-Medina & José Antonio Nuñez Mora, 2021. "Measuring information flux between social media and stock prices with Transfer Entropy," PLOS ONE, Public Library of Science, vol. 16(9), pages 1-19, September.
    3. Farag, Hisham, 2014. "The effectiveness of competing regulatory regimes and the switching effects: Evidence from an emerging market," Global Finance Journal, Elsevier, vol. 25(2), pages 136-147.

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