Academic journal article International Journal of Business

Structural Break in the Egyptian Stock Market: A Logistic Regression Analysis

Academic journal article International Journal of Business

Structural Break in the Egyptian Stock Market: A Logistic Regression Analysis

Article excerpt

ABSTRACT

This paper examines the structural behavior of the Egyptian stock market following the introduction of the economic reform program in 1991. The logistic regression results indicate significant changes in the data of market activity, market size, market liquidity, and market concentration. Overall, the Egyptian stock market experienced significant structural changes from 1991 to 1998. However, the Egyptian stock market needs further development to function properly.

JEL Classifications: C12, G10, N25

Keywords: Structural break; Stock market; Egypt; Logistic regression

I. INTRODUCTION

In the past few years stock markets have been set up in a number of developing countries in order to facilitate their financial development. The foundations of these stock markets were built to support the transition from planned-based to market-based economic systems. Egypt, like many other developing countries, embarked on an economic reform program in the early 1990s, which resulted in major and radical changes in its economic climate. Consequently, Egypt entered a new era in economic development bringing its capital market to the attention of foreign and domestic investors (Hegazy 1997 and El-Hilaly 1997).

However, the Egyptian economy has faced serious problems since the second half of the 1980s because of the combined effects of the collapse of oil prices and the sharp decline in Suez Canal dues and workers' remittances. At the same time, macroeconomic imbalances widened while the government found itself facing serious financial difficulties. As a result, the government was obliged to launch a reform program agreement with the International Monetary Fund (IMF) in 1987. This agreement, however, was cancelled three months later because of the government's failure to meet the IMF requirements. Perhaps not surprisingly, the country's economic situation continued to deteriorate, and at the onset of the Gulf War in 1990/91, the economy was on the brink of collapse. As Table (1) presents, by late 1990 Egypt's total external debt had reached US$ 49.2 (151% of the GDP negative real interest rates as a result of a 21% hyper-inflation rate, accompanied by a budget deficit almost 20% of the GDP). To further add to the country's economic upheaval, the total foreign reserve was just US$ 3.6 billion, and the GDP growth rate stood at 3.6%.

The end of the Gulf War proved to be a boon for Egypt and brought about positive changes to its economy. In particular, the Gulf States, the US, and the Paris Club agreed to increase their financial assistance to Egypt and to forgive and reschedule a significant portion of its debt (1). These developments eased the drain on foreign exchange, and improved Egypt's capacity to embark on another economic reform program supported by both the IMF and the World Bank in 1991. The program consisted of three phases: (1) stabilizing the current economy, reducing corruption, and restructuring the stock market; (2) reorganizing the financial sector and encouraging free trade, promoting privatization and private sector development; and then (3) consolidating the first and second phases. By 1998, these reform efforts were partly successful and led to some major achievements: (1) external debt and budget deficits were reduced to 38 and 1.3% of the GDP, respectively; (2) inflation was cut to 4.1%, which brought the real interest rate to the positive side; (3) international reserves reached more than US$ 18 billion; and (4) the annual GDP growth rate reached 5.7%

In market-based economies the capital market is an important means of mobilizing savings and reallocating resources, an avenue for domestic and foreign investment promotion via the stock market, and a significant source of capital formation and business financing. Consequently, with the introduction of the economic reform program, the Egyptian government recognized the role of the capital market in economic development, and that role became instrumental in the success of this program. …

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