Abstract
This study asks about the existence of co-variances and correlations among variances in the Saudi stock returns and aims at knowing which stocks are the most closely related to other stocks. A sample of five stocks representing basic materials, banking, services, food and transport sectors and reflecting the main trends in the Saudi market were selected (SABIC, Al Rajhi, Etisalat, Almarai and Al Bahri respectively). Daily stock returns were collected during the period from 2011 to 2016, representing the life of the five-year plan. The authors used the MARCH-DVEC methodology to estimate the variances and correlations of stock return variances, considering the interactions of stock return variances. The results confirmed the existence of positive co-variances and correlations between stock returns. Al Rajhi, Sabic and Etisalat stock returns showed the largest co-variances and correlations. The general trend values of co-variances indicated positive growth except for Al Bahri. This study concluded that relations between Saudi stocks are stable over time, confirming the Saudi stocks market stability.
Highlights
Stock markets are increasingly affecting economic activities
This study addresses the following main question: Are there any interactions in volatility between stocks in the Saudi stock exchange? The sub-question defined for this research is as follows: “What are the directions of volatility interrelations among stocks in this stock market?” By answering these questions, the authors aim at formulating a baseline for the understanding of interactions between stocks from different industries and highlighting the directions of interactions in the studied market
Using data extracted from stock returns, more precision can be added to multivariate generalized autoregressive conditional heteroscedasticity (M-GARCH) models and this would enhance the use of such models in other research
Summary
The directions of the stock volatility determine the features of a domestic economy, the credit classification, and the flow of investments in a country. Recent developments in financial econometrics provide accurate and precise models that capture different aspects about markets and deal with stock market volatility. Using data extracted from stock returns, more precision can be added to M-GARCH models and this would enhance the use of such models in other research. The application of M-GARCH models to the Saudi stock market tests whether correlations and covariances in such new market can be precisely captured without adjustments. The last point enhances theoretical facets related to the limitations of the model when focusing on correlations and covariances of stock markets in developing countries
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