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ABSTRACT
The correlation between volume and frequency with return volatility can explicate the information distribution process and informed traders' transaction behavior in a stock market. In this study, the Indonesian stock market represents the mixed market, while the Saudi Arabian stock market represents the Islamic market. We find that 94% and 96% of sharia-compliant stocks in Indonesia and Saudi Arabia follow the Mixture of Distribution Hypothesis (MDH). Consequently, we may conclude that sharia-compliant stocks in both markets are informationally efficient. However, we find that informed traders tend to behave differently in both markets. In the Indonesian market, informed traders exhibit competitive behavior in 95% of sharia-compliant stocks and strategic transaction behavior in only 5% of the stocks. In contrast, in the Saudi Arabian market, we find that informed traders exhibit competitive behavior in only 38% of the stocks and strategic behavior in 62% of the stocks. The findings suggest that social and religious contexts may affect market participants' behavior.
Keywords: Indonesia; informed trading; Saudi Arabia; SIAH; MDH
Received: 29 January 2019 Accepted: 11 June 2020
1. INTRODUCTION
Efficient Market Hypothesis suggests that every market participant can access and utilize information. Therefore, it is almost impossible to obtain abnormal returns (Fama, 1970). Extant literature also documents that Islamic capital markets tend to show lower market efficiency than conventional capital markets. The level of efficiency of sharia capital markets highly depends on the level of liquidity, institutional characteristics, and the behavior of market participants (Sensoy, Aras, & Hacihasanoglu, 2015).
Volume-volatility relations can identify the information distribution process (Karpoff, 1987). The process of information distribution consists of the Mixture of Distribution Hypothesis (MDH) and
the Sequential Arrival Information Hypothesis (SIAH). MDH assumes that the relationship between volume and price changes occurs contemporaneously and weakly exogenous (Clark, 1973). According to the assumption of MDH, the market participants nonrandomly and simultaneously obtain information (Clark, 1973). Meanwhile, SIAH information distribution process assumes that volume and return volatility occurs in lagged series, so that volume and price changes can predict each other (Copeland, 1976). SIAH assumes that market participants can randomly and sequentially obtain the information. However, they are unable to obtain the information simultaneously (Clark, 1973). SIAH can indicate the change in the price equilibrium. The final equilibrium occurs when...