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.
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