Abstract
We study the informational efficiency of the Saudi stock market (SSM), while accounting for corporate governance change, based on single, multiple, and variance ratio-based WALD tests and runs test. The main findings indicate that when the whole period is considered, the random walk hypothesis is rejected, but when divided into two sub-periods separated by the pre-corporate governance and the period marked by corporate governance change, the analysis demonstrates sub-period improvement in weak-form efficiency for the examined series. Robustness of results is verified by analysis using sector indices, which point to market efficiency. Interestingly, Hurst Exponent estimates evidence long-range dependence which suggests the predictability of stock prices and the prospect of speculative opportunities.
Highlights
We deepen the analysis on the efficiency of the Saudi stock market (SSM) by performing the Hurst exponent, calculated by means of the statistical method previously discussed on the logarithm of the daily, weekly, and monthly return series of the SSM, to evaluate the general validity of the results reported in Tables 5 and 6
This paper examines the efficiency of the SSM and addresses the related research question regarding whether changes in corporate governance matter
For the overall period from 1994–2016 our results indicate that stocks traded on the SSM do not follow the random walk hypothesis (RWH) and, the SSM can be considered generally informationally inefficient, which confirms the early findings of Al-Ghamidi and Opong (1999)
Summary
How efficient are the world’s stock markets? This question has continued to elicit the interest of researchers ever since the work of Samuelson (1965) and the persuasive treatise of Fama (1965, 1970, 1991); see, for example, Lo and MacKinlay (1988); Poterba and Summers (1988); Shiller (1989); Urrutia (1995); Kavussanos and Dockery (2001); Al-Khazali et al (2007); Kim and Shamsuddin (2008); Wang et al (2009); Borges (2010); Rejichi and Aloui (2012); Sensoy (2013); Gozbasi et al (2014); Tiwari and Kyophilavong (2014); Metghalchi et al (2015), Anagnostidis et al (2016), and Seetharam et al (2017). This paper seeks to extend our understanding and build on the mentioned literature by analysing the efficiency of the Saudi stock market (SSM) and, in doing so, identify whether the changes in corporate governance following the stock market crash of 2006 improved SSM efficiency. If such changes do have some influence, it can be inferred that corporate governance mechanisms have improved the timely release of information and contributed favourably to the timeliness of price discovery and gradual improvement of the SSM’s efficiency. Few studies have focussed solely on the SSM
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