Macroeconomic Forces and Stock Prices: Some Empirical Evidence from Saudi Arabia

Abstract

This paper examines if there exists a long run relationship among five macroeconomic variables, consumer price index, industrial output, money supply, exchange rate, oil prices along with the global stock prices proxy Standard and Poor 500 index and Saudi all share stock index. Time series analysis is applied using monthly data from January 1994 to June 2013. Application of Johansen cointegration test finds the existence of a long run relationship among the chosen variables. All macroeconomic variables are found to impact stock prices. Standard and Poor 500 index does not affect Saudi stock prices. Vector error correction model shows the presence of long run causality from the explanatory variables to the stock prices. Short run causality test finds a two-way causality between stock prices and oil prices. Impulse response function shows that industrial production shocks pushes up stock prices while consumer price index shocks pulls it down. Variance decompositions show that historical stock prices are the major driver of Saudi stock prices. This implies that Saudi stock market follows weak form of market efficiency. The results of this paper have important implications for the investors in Saudi stock market.

A Cointegration Analysis of Money Supply and Saudi Stock Price Index

“…(iii) VECM suggests long run causal relationship that run from SSPI to M1 for annual data but not the other way around which supports the Post-Keynesian finding. This result is not consistent with finding of Kalyanaraman and Al Tuwajri (2014) regarding the long run causality issue. (iv) This result supports the efficient markets hypothesis with respect to M1 and M2 since money supply does not affect the SSPI.…”

“…Granger causality tests show no causal relationship between Saudi stock market returns and the exchange rate. Kalyanaraman and Al Tuwajri (2014) testes the possibility of a long run relationship among five macroeconomic variables, consumer price index, industrial output, money supply, exchange rate, oil prices and the global stock prices proxy Standard and Poor 500 index and Saudi all share stock index. Time series analysis is applied using monthly data from January 1994 to June 2013.…”

A Study of the Effect of Macroeconomic Variables on Stock Market: Saudi Perspective

“…Kalyanaraman and Al-Tuwajri (2014) examined the existence of long run relationship among five macroeconomic variables of CPI, industrial output, money supply, exchange rate, oil price along with proxy of S&P 500 and the TASI (Saudi All stock index). They used the monthly data from 1994 to 2013 and applied the time series analysis.…”

“…GDP, exchange rate, interest rate, and current account balance (Acikalin, Aktas & Unal, 2008), market capitalization, industrial production, the economic sentiment indicators and inflation (Subeniotis, Papadopoulos, Tampakpodis, and Tampakpoudi, 2011), yield curve spreads and inflation rates (Chen, 2008), CPI, industrial output, money supply, exchange rate, oil price (Kalyanaraman and Al-Tuwajri, 2014), Exchange rate, IIP, WPI, (Singh, Tripathi, & Parashar, 2013), effective exchange rate of dollar in short period of time (Bahmani & Sohrabian, 1992), and exchange rates (Abdulla & Murinde, 1997).…”

“…In this regard along with an extensive literature review we also referred specific recent few important studies which considered the Saudi stock return as a dependent variable and other economic factors as the independent variables [Kalyanaraman and Al-Tuwajri (2014), Arouri and Rault (2010) and Onour (2008)]. This paper examines the three important factors influencing the returns in the Saudi Stock Exchange (TASI) based on the macroeconomic variables of Saudi Economy.…”