The reaction of the Egyptian stock market to recurring devaluations: an event study approach

Abstract

Purpose

This paper examines the reaction of the Egyptian stock market to two substantial devaluations of the Egyptian pound (EGP) in 2022 and tests the informational efficiency of the Egyptian market.

Design/methodology/approach

The paper uses the event study framework to analyze the significance and direction of abnormal returns of the leading index of the Egyptian stock market (EGX30) on and around the devaluation days. It employs both the constant mean model and the market model to estimate the normal returns of the EGX30. Additionally, the paper uses data on two equity indices, one global and one for emerging markets, as benchmarks for normal returns.

Findings

The paper finds that the Egyptian stock market experienced significant positive abnormal returns on the devaluation days of the EGP in March and October of 2022, indicating a positive market reaction to the devaluation. Furthermore, evidence suggests that the Egyptian market may not be informationally efficient as significant positive abnormal returns were observed two weeks before and two weeks after the devaluation day, suggesting news leaks and delayed reactions, respectively.

Originality/value

This study is the first to examine the impact of the recent two devaluations of the EGP in 2022 on the Egyptian stock market. It complements existing literature by analyzing the immediate market reaction to two consecutive devaluations in an African country. Furthermore, the paper evaluates the efficiency of the Egyptian market in processing information related to exchange rates.

Citation

Elroukh, A.W. (2024), "The reaction of the Egyptian stock market to recurring devaluations: an event study approach", African Journal of Economic and Management Studies, Vol. 15 No. 3, pp. 519-533. https://doi.org/10.1108/AJEMS-09-2023-0347