Investors’ Reaction to Sharp Price Changes in GCC Markets

Abstract

We examine investors’ reactions to sharp price changes in seven equity markets of Gulf Cooperation Council (GCC) countries to uncover patters of price formation. We compare the price behavior and volatility of these markets within a 15-day window following the arrival of new information. We find that the arrival of unexpected news that results in sharp price changes significantly increases market volatility in all GCC markets and that the subsequent price adjustments mostly exhibit upward corrective patterns. Contrary to the findings from some markets in other developed and developing countries, these results are consistent with the prediction of Uncertain Information Hypothesis. In reaction to both good and bad news, investors initially set equity prices below their fundamental values and subsequent price trends register an upward adjustment. These findings suggest that investors in GCC equity markets react rationally to the arrival of unexpected news and that no contrarian investment strategy can be utilized to generate abnormal return.