The Augmented Dickey Fuller unit root test

Note: LRGDP, LCAP, LSTV, LINV, LINF are Real Per Capital GDP growing, Market Capitalization, Stock Trade Value, Foreign Direct Investment and Inflation severally. LL represents lag length that is selected utilizing Akaike ‘s Information Criteria ( AIC ) . Asterisks ( * ) , ( ** ) and ( *** ) indicates that critical values at 10 % , 5 % and 1 % degrees of significance severally.

Table 1 presents the Augmented Dickey Fuller unit root trial. The Augmented Dickey Fuller trial of stationary was used in degrees and first differencing of the series. The Augmented Dickey Fuller unit root trial is conducted by first adding intercept, subsequently adding tendency and intercept variables in the arrested development. The variables are transformed into log prior to analysis to get the better of broad disparity in variables value. The ADF trial statistics ( in first difference and degrees ) above indicated that the variables in degrees are non stationary, while variables in first difference are stationary. Since all the clip series variables are stationary in first difference, therefore farther trials such as co integrating trial can be conducted

Table 2: Consequences of Johansen Co integrating Test for Saudi Arabia

Hypothesized No. of CE ( S )

Trace Statisticss

0.05 % Critical Value

Max-Eigen Statisticss

0.05 % Critical Value

None*

90.30735

76.97277

44.10069

34.80587

At most 1

46.20667

54.07904

20.46148

28.58808

At most 2

25.74519

35.19275

15.60178

22.29962

At most 3

10.14341

20.26184

6.480008

15.89210

At most 4

3.663397

9.164546

3.663397

9.164546

Notes: Trace and Max-eigenvalue trials indicate 1 carbon monoxide incorporating equations at the 0.05 % degree.

( * ) denotes rejection of the hypothesis at the 0.05 % degree.

It is of import to execute Augmented Dickey fuller trial to corroborate if the series are stationary or non stationary. If there is grounds that the series are stationary, so one could continue to co integrating trial to look into if there is being of long tally relationship. When the series are integrated of the same order, so a additive combination of such series exist, and we could state that the series are co integrated.

In this survey Johansen carbon monoxide integrating trial is used to corroborate if there is long tally relationship between existent per capital GDP and market capitalisation, stock traded value, foreign direct investing and rising prices. Optimal slowdown length is chosen utilizing Akaike ‘s information Criteria.

Co integration Equations

LRGDP = -0.087985 + 0.031155CAP+ 0.030653STV -3.783728INV -0.424683INFt

( 0.20684 ) ( 0.01660 ) ( 0.00641 ) ( 0.53725 ) ( 0.11028 )

Table 3: Dependant Variable is RGDP ( Real per capital GDP )

Independent Variables

Coefficients

Standard Error

T-test

Cap

0.031155

0.01660

1.8768

STV

0.030653

0.00641

4.7821

INV

-3.783728

0.53725

-7.0428

INF

-0.424683

0.11028

-3.8510

Co integrating trial helps to place whether there exist a long-term relationship between the variables. The equation above explains the relationship between existent per capital GDP growing ( RGDPC ) and market capitalisation ( cap ) , stock traded value ( STV ) , foreign direct investing ( INV ) and rising prices. The consequences show that market capitalisation is positively related to existent per capital GDP growing. This suggests that as market capitalisation additions, existent per capital GDP growing additions. Similarly, stock traded volume ( STV ) is undistinguished but positively related to existent per capital GDP growing. This suggests that as stock traded volume additions, existent per capital GDP growing additions. This consequence implies that stock market development lead growing in Saudi Arabia. Furthermore, foreign direct investing ( FDI ) is important and negatively related to existent per capital GDP growing. This suggests that as foreign direct investing additions, existent per capital GDP growing decreases. This could be because Saudi Arabia is a closed economic system. Furthermore, rising prices rate ( INF ) is important and negatively related to existent per capital GDP growing. This indicates that as rising prices rate additions, existent per capital GDP growing lessenings.

Table 4: Granger Causality Test Results

Dependent Variable

Predictor Variable

Lag Length

F-Statistics/ P-Value

Granger Causality

Cap

RGDPC

RGDPC

Cap

3

3

0.40528 ( 0.7506 ) 0.61709 ( 0.6107 )

NO

NO

STV

RGDPC

RGDPC

STV

3 3

0.28025 ( 0.8391 ) 0.81741 ( 0.4969 )

NO

NO

INV RGDC

RGDP C INV

3 3

0.01483 ( 0.9975 0.26177 ( 0.8522 )

NO

NO

INF RGDPC

RGDP INF

3 3

0.40892 ( 0.7480 ) 0.09025 ( 0.9647 )

NO

NO

Note: Valuess in parentheses are p-values. The last Column consequences ( Yes or No ) is based on whether the p-value is less than or greater than 5 % chosen degree of significance. If the p-value is less than chosen degree of significance ( 5 % ) , we reject Hnull ( that is Granger causality exist ) . If p-value is greater than chosen degree of significance ( 5 % ) , we do non reject Hnull ( that is Granger causality does non be ) .

Table 5: Granger Causality Test Results

Dependent Variable

Predictor Variable

Lag Length

F-Statistics/ P-Value

Granger Causality

Cap

RGDPC

RGDPC

Cap

4

4

0.37122 ( 0.8264 ) 0.70624 ( 0.5966 )

NO

NO

STV

RGDPC

RGDPC

STV

4 4

0.29696 ( 0.8766 ) 0.72827 ( 0.5826 )

NO

NO

INV RGDC

RGDP C INV

4 4

0.00559 ( 0.9999 ) 0.27883 ( 0.8884 )

NO

NO

INF RGDPC

RGDP INF

4 4

0.57695 ( 0.6825 ) 0.15193 ( 0.9600 )

NO

NO

Note: Valuess in parentheses are p-values. The last Column consequences ( Yes or No ) is based on whether the p-value is less than or greater than 5 % chosen degree of significance. If the p-value is less than chosen degree of significance ( 5 % ) , we reject Hnull ( that is Granger causality exist ) . If p-value is greater than chosen degree of significance ( 5 % ) , we do non reject Hnull ( that is Granger causality does non be ) .

Table 4 and table 5 present the consequences of Granger causality trials. The first column in each tabular array lists dependent variable while the 2nd column in each tabular array lists the forecaster variable. A statistical significance F-test indicate that the forecaster variable farmer do the dependant variable. The last column shows if granger causality exists or does non be. Lag length 3 and lag length 4 are used for comparing intents. The farmer causality consequences reveal that all the variables do non granger causes each other when slowdown length 3 or lag length 4 are used.

Chapter 5 5.1 Drumhead

This subdivision gives sum-up of the survey and policy deductions of the consequences obtained in chapter four. The survey has examined the causality between stock market development and economic growing in Saudi Arabia. Quarterly clip series informations for 11 old ages get downing from 1999 to 2009 are used to carry on the analysis. Augmented Dickey Fuller unit root trial, carbon monoxide integrating trial and Granger causality trials were performed on the variables.

The survey reveals that market capitalisation ( CAP ) , stock traded volume ( STV ) are positively related to existent per capital GDP growing. This suggests that as market capitalisation additions, existent per capital GDP growing additions. Similarly, stock traded volume is positively related to existent per capital GDP growing which indicates that as stock traded volume additions, existent per capital GDP additions.

The survey besides shows that foreign direct investing ( INV ) and rising prices rate are negatively related to existent per capital GDP growing. This suggests that as foreign direct investing and rising prices rate additions, existent per capital GDP growing additions.

5.1 Deduction of Findingss

The deduction of these findings is that policy aimed at developing the capital market could increase existent per capital GDP growing in Saudi Arabia. In order words, stock market development lead growing in Saudi Arabia. The consequences are non surprising since it is expected that stock market development should take growing at the early phases of stock market development in developing state.

The consequences reveal the attempt of policy shapers to guarantee that Saudi Arabia stock market is developed as shown by the positive relation between existent per capital GDP growing rate and market capitalisation every bit good as stock traded volume usage as placeholders for stock market development.

Based on the consequences, it is suggested that policy shapers should be more proactive in reforming the fiscal sector in order to go on to increase existent per capital GDP growing in an unfastened and developing economic system like Saudi Arabia.

.

5.2

Future research could widen this survey utilizing advanced clip series econometric analysis like vector mistake rectification theoretical account.