Investors' reaction to unexpected price innovations: the case of GCC countries

Abstract

We examine investors' reactions to sharp price changes in seven equity markets of Gulf Cooperation Council (GCC) countries to uncover patterns of price formation. We compare the price behaviour and volatility of these markets within a 15-day window following the arrival of unexpected sharp price changes. We find that the arrival of sharp price changes significantly increases market volatility in all GCC markets and that subsequent price adjustments mostly exhibit upward corrective patterns. These findings are consistent with the prediction of the uncertain information hypothesis. Faced with unexpected positive and negative price changes, investors react rationally by initially setting equity prices below their fundamental values, with subsequent price trends registering an upward adjustment. These findings suggest that contrarian investment strategy cannot be utilised in these cases to generate abnormal returns in GCC markets.