Abstract
The impact of macroeconomic variables on the financial market efficiency has been a hot topic for decades. Thus, this study investigates the effect of oil price changes on the financial market performance using the estimation of Auto-Regressive Distributed Lag (ARDL) technique in Saudi Arabia for the period 1980-2018. The results revealed a long-run causality between the exchange rate, return on investment, and oil prices towards the financial market efficiency. However, only inflation and return on investment have causality effects on financial market efficiency in the short run. In addition, the exchange rate and oil price do not have causality running to economic market efficiency. Thus, both the short-run and long-run causality effects should be considered as guidelines to be followed by policymakers to avoid any misleading macroeconomic strategies in future strategic planning. The speed of adjustment reported from estimating the Conditional Error Correction Regression is (-0.114527). Also, the model was found stable from using both the CUSUM and CUSUMQ statistics.
Highlights
An efficient financial market is characterized by prices that reflect all available public information, a lack of bubbles, the capacity to manage risks through hedging, and the tendency to allocate savings to their most productive investment use (Tobin, 1984)
The main objective of this study is to investigate the effect of oil price changes on the financial market performance using the estimation of Auto-Regressive Distributed Lag (ARDL) technique in Saudi Arabia for the period 1980-2018
Research Variables This study investigates the impact of oil price among other macroeconomic variables on financial market efficiency in Saudi Arabia
Summary
An efficient financial market is characterized by prices that reflect all available public information, a lack of bubbles, the capacity to manage risks through hedging, and the tendency to allocate savings to their most productive investment use (Tobin, 1984). This characterization is based on Tobin’s 1984 definition of financial efficiency. Omitted in the neoclassical growth model, the role of financial markets for economic growth was raised by Schumpeter (1911), Goldsmith (1969), and King and Levine (1993). Rajan and Zingales (1998) show that industrial sectors that are relatively more capital intensive have been developed much more in countries where financial markets are already created
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