A battery of variance ratio (VR) tests was applied on to weekly price index data of the Egyptian Exchange (EGX) to empirically test two hypotheses. First, it hypothesised that regulatory changes, taking the form of expanding the price limits and adopting trading halt for a few minutes, positively affects the informational efficiency of the EGX. Second, it hypothesised that large-capitalised stock (with availability of more information) are likely to satisfy the random walk hypothesis (RWH) whereas small-capitalised stocks are likely to violate it. During the first sub-period, extends from 2nd of February 1997 to 21st of July 2002, the EGX imposed tight price limits on the movements of listed shares. During the second sub-period, stretches from 22nd of July 2002 to 29th of June 2007, the EGX shifted to adopt wide boundaries coupled with trading halt for a few minutes if share prices hit their new limits. The VR methodologies detect deviation from the RWH by exploiting the fact that the variance of a random walk process is proportionally linear in the holing period. Results indicated that the EGX, as whole, moved towards efficiency in the second sub-period indicating that the new circuit breaker regime facilitated the price discovery process as information is efficiently incorporated into equity prices once trading is resumed after trading suspended. It was found that, in the second sub-period, prices of large-capitalized firms satisfied the RWH whereas those of small-capitalized firms violated it. It is highly recommended to avoid adopting tight price limits since they adversely affect the market efficiency. Given the structural breaks being noticed in data and misleading nature of single VR tests and the superiority of the joint exact sign test in the presence of extreme outliers, it is important to re-visit the RWH for emerging markets characterised by the presence of structural breaks.
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