When an event is not an event: the curious case of an emerging market

What is it about?

Shares trading in the Bolsa Mexicana de Valores do not seem to react to company news. Using a sample of Mexican corporate news announcements from the period July 1994 through June 1997, this paper finds that there is nothing unusual about returns, volatility of returns, volume of trade or bid–ask spreads in the event window. We provide evidence that suggests that unrestricted insider trading causes prices to fully incorporate the information before its public release. The paper thus points toward a methodology for ranking emerging stock markets in terms of their market integrity, an approach that can be used with the limited data available in such markets.

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Why is it important?

This paper is important for two reasons. First, in terms of concept, the paper showed that event studies are not possible in markets with rampant insider trading. Second, in terms of practice, the paper gave regulators a tool to detect insider trading -- become very suspicious when prices do not move in days they are supposed to move -- and this tool has been used ever since by them.

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