Abstract
This paper aims to detect factors, which drive Tadawul All Stock Index (TASI) of the Saudi Stock Market during the period August 2005 May 2017. The application of Autoregressive Distributed Lag model (ARDL) and Bounds test revealed that there is no long-run relationship exist if consumer price index, interest rate, oil prices, general price level (P) and government expenditure are included in the model. While price-earnings ratio, nominal effective exchange rate (NEER), money supply (M3), and long term credit (L) relate significantly to TASI in both the short-run and long-run with an error correction term -0.22 i.e. disequilibrium takes four and half month to correct. Half of explanatory variables are fixed namely NEER, and L, while PE and M3 are dynamic. The GARCH model presented that news plays significant role in the volatility of stock market returns. Smaller GARCH term than ARCH indicates that a shock will take short time to die out.
Highlights
Stock markets play an unequivocal role in the economic activity serving as a mediator between lenders and borrowers
There two views referring to the relationship between stock market and macroeconomic variables, i.e. stock market is an indicator of economic activity if future performance of corporate and profits are reflected in prices, the second one assumes the opposite, the stock market affects economic activity via aggregate consumption and investment (Ahmed 2008, Thaker 2009)
Tadawul All Stocks Index (TASI), nominal effective exchange rate (NEER), and price-earnings ratio (PE) are presented in points, money supply (M3), and long term bank credit (L) are in million Riyals, and all variables are available in web site of the Capital Market Authority for the period August 1997-May 2017. http:/sama.gov.sa/ar-sa/Economic Reports/Pages/Annual Report.aspx
Summary
Stock markets play an unequivocal role in the economic activity serving as a mediator between lenders and borrowers. There two views referring to the relationship between stock market and macroeconomic variables, i.e. stock market is an indicator of economic activity if future performance of corporate and profits are reflected in prices, the second one assumes the opposite, the stock market affects economic activity via aggregate consumption and investment (Ahmed 2008, Thaker 2009). Understanding the relationship macroeconomic variables and the stock market makes the government capable of stabilizing the stock market and the economy as a whole which attract investors and firms (Barakat, Algazzar and Hanafy 2016). The number of companies increased with time to inspire the government to form a joint committee from Ministry of Finance and National Economy and Saudi Monitory Authority (SAMA) in 1984 to be responsible for organizing and monitoring the stock trading. Listed comprises dealing in free floating shares that determine TASI performance are 163
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