Information Arrival and Volatility: Evidence from the Saudi Arabia Stock Exchange (Tadawul)

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 the Saudi Exchange (Tadawul). The sample comprises 15 sector indices from April 2008 to August 2013. The relationship between volatility and information arrival was modelled using TGARCH. The 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 of the paper 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 unique characteristic of the Saudi equity market where a large number of domestic investors generate a large number of trading transactions. This can be attributed to unique characteristic of the Saudi equity market where only the domestic investors are allowed to trade. Further, the results reveal that the leverage effect was amplified, indicating a more pronounced asymmetric effect of bad news on volatility, when the number of trade is included as a regressor in the variance equation.