Evaluation of the Impact of Financial Sector Reforms on Stock Market Efficiency: The Case of Egypt

This thesis aims at contributing to the literature on the Egyptian stock market efficiency by empirically conducting a financial sector reforms impact assessment on the efficiency of the stock market at large as measured by the main index issued by the Egyptian Exchange, and on individual stocks that were impacted with stock market specific reforms at one point of time. Efficiency parameter estimates are conducted on a time-varying basis stemming from the believe that stock markets evolve through time, and so does the level of efficiency. The adopted statistical techniques utilized the Kalman Filters technique to obtain the time-varying efficiency parameters for the autoregressive model at the market and individual stocks level. Other deterministic models would have only resulted in a single point estimate for efficiency which does not render assessing the time-varying impact of reforms on efficiency feasible. The positivism philosophy and a deductive approach has been adopted based on the statistical nature of this research and the well-grounded theories covering the stock markets efficiency.

The financial sector reforms are presented with specific focus on capital markets reforms. Proxy variables have been constructed to capture reforms, with some of those reforms impact being tested on the market level, and others on individual stocks level. The proxy variables construction is based on the trading data obtained from the Egyptian Exchange after segregating the data in such a manner to construct proxy variables that reflects the different reforms, and on the dates of introducing the reform measures.

Ranking the reforms impact on the time-varying efficiency parameter indicated that the implemented financial sector reform program, per se, had the biggest impact on improving the efficiency on the market level, the free float percent to be of a significant positive impact when assessed on both, individual stocks and the market. Another important factor is the presence of wide circuit breakers and price limits for traded securities. The wider the price limits, the greater the positive impact on price efficiency.

Most of the proxy variables yielded results conforming with the prior expectations regarding its impact on the time varying efficiency, apart from few on the market and on the individual stocks levels. Reforms’ ranking provides guidance to designing future reform plans as it shows the positive impact of having a clearly identified and announced reform plan, the importance of market depth reforms as represented by the free float of companies, the necessity of not having hindrances for the price adjustment mechanisms, and the importance of having sizable offerings to the public. Liquidity enhancement reforms such as the same-day trading had a positive impact on efficiency on the market level, albeit with a smaller magnitude.