The objective of this study is to find the dynamics of the relationship between bank loans and stock prices in Saudi Arabia using quarterly data for the period 1998 to 2013. The estimation methodology consists of a cointegration test, an error correction model estimation, and VAR Granger Causality. The study confirms the long-run relationship between credit card loans (CCLOAN) and Saudis stock market index (SSPI). We found a positive relationship between SSPI and bank loans, supporting the economic theory that as stock prices rise, the supply and demand for bank loans increase. This positive relationship between SSPI and bank loans is true for all types of bank loans except CCLOAN. The negative relationship between CCLOAN and SSPI can be justified because CCLOAN is affected mainly by the consumption decision, which depends on the wealth effect. The study confirms that the total bank loans (TOTALL) react positively to an increase in stock prices in Saudi Arabia, and not the other way around, supporting the efficiency hypothesis of the stock market of Saudi Arabia. Therefore, the study tends to conclude that TOTALL plays no significant role in transmitting stock market shocks to the real sector. An important implication obtained from this study is that the health of the banking sector depends crucially on stock market stability. Policies to stimulate bank loans in an attempt to boost stock market activities may be futile in Saudi Arabia.

This paper aims to use the Cointegration to analyze the relationship of money Supply and Saudi Stock Price Index (SSPI) using different measure of money supply M1 and M2 and different time series; annual data from 1985 until 2012 and monthly data from 2000 until 2013. The goal is to discover the relationship between SSPI and MS and to identify the long run as well as the short run causality using Vector Error Correction Model (VECM). The most important finding is the confirmation of long run relationship between M1 and SSPI as well as M2 and SSPI in both monthly and yearly data. The study has found that the long run causality is running from SSPI to M1 for annual data but not the other way around. This finding supports the Post-Keynesian theoretical approach which indicates the endogeneity of MS. Moreover, the result is consistent with efficient stock markets hypothesis since MS does not affect the SSPI in the long run. The implication of this result is that Saudi Arabian Monetary agency as well as commercial banks cannot affect the Saudi Stock prices through change in MS. This paper assures bidirectional short run causal relationship (or feedback effect) between SSPI and M1 by using annual data. The paper has not found neither long run nor short run causal relationship between SSPI and M2 with annual data. Furthermore, the study could not prove any long run or short run causality between M1 and SSPI or between M2 and SSPI through the use of monthly data.

In this paper, the endogenous money supply hypothesis in Saudi Arabia is examined using data from January 1997 to February 2015. The study uses Johansen cointegration technique and Vector Error Correction models (VECM) for cointegrated series.The long run causality was found to run from bank loans (BL) and from demand deposit (TD) to the money supply (MS1), and not from MS1to BL, as the mainstream view. The endogenios money supply hypothesis is reinforced by the long run causality running from BL to TD. For MS2, the study verifies a long run causality running from BL and TD to MS2. Therefore, the money supply of Saudi Arabia whether using MS1 or MS2 is endogenous in the long run. The result of short run causality with regard of MS1 using Wald Test does not confirm money supply endogeneity in the short run. Short run causality using Granger with regard to MS2 assures short run causality running from TD and BL to MS2. The implication of this work is that Saudi monetary agency can not control the money supply in the long run. It only has some influence on MS1 in the short run.