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Information arrival and volatility: Evidence from the Saudi Stock Exchange (Tadawul)

Ezzat Hassan (Maastricht School of Management, Maastricht, the Netherlands)
Kirkulak-Uludag Berna (Dokuz Eylul University, Faculty of Business, Izmir, Turkey)

This paper investigates the validation of the Mixture of Distributions Hypothesis (MDH) using trading volume and number of trades as contemporaneous proxies for information arrival in 15 sector indices of the Saudi Stock Exchange (Tadawul) using the TGARCH model. Findings provide strong evidence for the validity of the MDH for the Saudi market. Volatility persistence decreases when the trading volume and the number of trades are included in the conditional variance equation. The most striking finding is that contemporaneous number of trades is a better proxy for information arrival than trading volume, interacting with volatility in a manner anticipated under the MDH. This can be attributed to the unique characteristic of the Saudi equity market where only domestic investors are allowed to execute trade transactions. Further, the results reveal that the leverage effect was amplified, indicating a more pronounced asymmetric effect of bad news on volatility.

Keywords: volatility, trading volume, number of trades, MDH, Tadawul