The stock market and economy of Saudi Arabia

Overview of the survey

Stock markets have received a great trade of attending, both as a beginning of fiscal development and finally economic growing, and in the context of big swings in stock market rating. The deepness of a stock market as captured by the market capitalisation is an of import step of one facet of fiscal development. The function of stock markets as a portion of fiscal markets in economic development procedure is emphasized by growing theories.

Stock markets have going more incorporate in recent old ages. There are several factors that contributed to the linkages or mutualities of stock market. The inquiry of whether the stock market can calculate the economic system has been loosely debated. “ The stock market is futuristic and current monetary values reveal the approaching net incomes possible or productiveness of companies ” , this statement argues by those who support the market ‘s prognostic capacity. Since stock monetary values reveal outlooks about profitableness and since profitableness is straight linked to economic activity, fluctuations in stock monetary values are consideration to take the way of the economic system stated by Christo Luus, Economist of Johannesburg in South Africa.

Harmonizing to IMF in twelvemonth 2008 the subprime crisis that began in August 2007 in the USA has been labeled as the worst fiscal crisis since the Great Depression. Largest fiscal shocked has been developed by this crisis and impacting serious injury on markets and establishments at the nucleus of the cosmopolitan fiscal system. The stock market activity is one of the chief activities in the corporate universe among the concatenation of activities, which got affected due to the fiscal crisis.

Some surveies have suggested that the stock market development can hold extremely constructive function in promoting growing. Fama ( 1991 ) argues that the stock market is a individual prima index of the concern rhythm. This is contrary to Harvey ( 1989 ) , who finds that the stock market is non a forecaster of economic activities. These surveies have happening the causality between stock market and economic growing in Saudi Arabia.

Stock market

The stock market indices are one of the chief indexs of the economic activities. Harmonizing to the Wikipedia, a stock market or equity market is a public market ( a loose web of economic minutess, non a physical installation or distinct entity ) for the trading of company stock and derived functions at an in agreement monetary value ; these are securities listed on a stock exchange every bit good as those merely traded in private. Fundss are channeled from rescuers to borrowers, either straight or indirectly. The direct channel is through fiscal markets, exchanges where securities or fiscal instruments are bought and sold. Fiscal markets provide direct finance when borrowers issue securities straight to rescuers.

In chief, a good working stock market may assist the development procedure in an economic system through the followers ; first growing of nest eggs, secondly efficient allotment of investing resources and in conclusion better use of the bing resources. The stock market is supposed to promote nest eggs by supplying family with an extra instrument which may break run into their ain hazard penchants and liquidness demands. If a family has a sudden addition in wealth, its current and future ingestion degrees will increase. One of the chief constituents of family wealth is the value of stocks held by family. When stock monetary values rise, family wealth additions, and when stocks monetary values autumn, family wealth lessenings. Stockss monetary values affect the economic system by impacting family wealth, which affects family ingestion. In good developed capital market, portion ownership provides persons with a comparatively liquid agencies of sharing hazard in investing undertaking.

Cliff Pratten claims that the activities of purchasing and selling stock and portions on the stock market are highly of import for the allotment of capital within economic systems. Although mast of the concern on the stock market consists of covering in go outing securities, the monetary values of these securities provide of import signals. Companies whose portion monetary values are at premium to the book value of their assets and low dividend outputs have a badge of blessing which enhances their opportunities of borrowing capital on favorable footings and of raising capital by publishing new portions. Besides that, dealing monetary values and citations provide investors with an indicant of the market value of their wealth which may act upon their determinations about ingestion outgo. When monetary values are at historically high degree and lifting this indicates assurance among investors and may impact the assurance of business communities and hence their investing determinations.

1.1.2 Economic growing

Economic growing is the addition of per capita gross domestic merchandise ( GDP ) or other step of aggregative income. Traditional neoclassical theoretical accounts of growing are a direct branch of the Harrod-Domor and Solow theoretical accounts, which both stress the importance of nest eggs. The Solow neoclassical growing theoretical account in peculiar represented the seminal part to the neoclassical theory of growing and subsequently earned Solow the Noble Prize in economic science. It expanded on the Harrod- Dumor preparation or Harrod-Dumor growing theoretical account by adding a 2nd factor, labour and presenting a 3rd independent variable, engineering to the growing equation.

Traditional neoclassical growing theory, end product growing consequences from one or more of three factors: addition in labour measure and quality ( through population growing and educational ) , 2nd addition in capital ( through economy and investing ) and thirdly betterment in engineering. The Solow neoclassical growing theoretical account, for which Robert Solow of the Massachusetts institute of Technology received the Nobel Prize, is likely the best known theoretical account of economic growing.

Growth is a chief of import portion behind of a success of a state. It is frequently measured as the rate of alteration in GDP. Economic growing refers merely to the measure of goods and services produced. Economic growing can be either positive or negative. Negative growing can be referred to by stating that the economic system is shriveling. Negative growing is associated with economic recession and economic depression.

1.2 Saudi Arabia

Beginnings: WORLD DEVELOPMENT INDICATOR ( WDI ) 2009

Above graph shows market capitalisation in Middle East states on twelvemonth 2009. Harmonizing to WDI Saudi Arabia ‘s market capitalisation is highest among it. Market capitalisation is a placeholder to stock market in this survey. GDP of Saudi Arabia is stable from earliest 1970ss until late. So we choose Saudi Arabia as a instance of this survey.

1.2.1 Background of Saudi Arabia

The Kingdom of Saudi Arabia covers most of the Arabian Peninsula. It is a big state. It is approximately one-third the size of the Continental United States and the same size as all of Western Europe. It size is 2186000 square kilometres. The major West seashore port of Jeddah is 1500 kilometers by route from its east seashore opposite number, Dammam. The province bordering Saudi Arabia, get downing from the North and proceeding in a clockwise manner, are Jordan, Iraq, Kuwait, Bahrain, Qatar, the United Arab Emirates, Oman and Yemen.

Harmonizing to the universe fact book ; Saudi Arabia ‘s terrain is varied but on the whole reasonably sterile and rough, with salt flats, crushed rock fields, and sand dunes but few lakes or lasting watercourses. In the South is the Rub Al-Khali ( Empty Quarter ) , the largest sand desert in the universe. In the sou’-west, the mountain ranges of Asir Province rise to over 9,000 pess.

1.2.2 Economy of Saudi Arabia

Saudi Arabia is the universe largest proved oil militias and is the universe largest exporter of oil. Its oil industry is province owned, and the authorities maintains command over all of the land ‘s mineral resources. The Saudi Arabial oil company, known as Saudi Aramco, is the universe ‘s largest oil company.

The Saudi Arabia economic system expanded 0.60 per centum over the last twelvemonth, as measured by the year-over-year alteration in Gross Domestic Product. Unlike the normally used quarterly GDP growing rate the one-year GDP growing rate takes into history a full twelvemonth of economic activity, therefore avoiding the demand to do any type of seasonal accommodation. The Saudi Arabia Gross Domestic Product is deserving 369 billion dollars or 0.60 % of the universe economic system, harmonizing to the World Bank. From 1969 until 2009, Saudi Arabia ‘s mean one-year GDP Growth was 5.06 per centum making an historical high of 27.49 per centum in December of 1974.

Opportunities for economic growing have increased steadily over the decennaries since King Abdulaziz bin Abdelrahman Al-Saud founded the Kingdom in 1932. , the airy King Abdulaziz began to do programs for the puting down of the state ‘s substructure. In June 1986, the riyal was officially pegged to the IMF ‘s Special Drawing Rights ( SDRs ) . In pattern, it is fixed at 1 U.S. dollar equal to 3.75 riyals, which translates to about 1 riyal is 0.266667 dollar. The Saudi Arabian Monetary Agency chose non to follow suit, partly due to concerns about the inflationary effects low involvement rates and a lower value for the riyal. The riyal returned to its nog against the U.S. dollar in early December of 2007.[ 1 ]

Achievement an economic transmutation required deliberate planning and careful execution of a development plan with clearly defined aims. The mission for economic development and growing began in earnest with the debut of the First Development Plan in 1970. This began a series of five-year programs that continues today. Saudi Arabia is one of the fastest developing states in the universe and it is the most dynamic economic power in the Arab universe.[ 2 ]

1.2.3 Stock Market of Saudi Arabia

The Saudi ‘s stock market is the largest in the Middle East states with high market capitalisation in twelvemonth 2009. Stock market is really stable and rising prices rates are normally low. The Saudi Arabia joint stock companies had their beginning in the mid 1930 ‘s, when the first such company, the Arab Automobile Company was established. On 1975 there were 14 public companies. The rapid economic enlargement and Saudisation of foreign Bankss in the 1970 ‘s led to the constitution of a figure of big corporations and joint veture Bankss. Major portion offering were made the public during this period. The market remained informal, until the early 1980 ‘s when the authorities embarked on a rapid development plan.[ 3 ]

The Saudi Arabian stock market is known by the name of Tadawul and is the lone securities exchange in Saudi Arabia. Before the twelvemonth 2001, the lone stock exchange in Saudi Arabia is Electronics Securities Information System ( ESIS ) . It was developed and operated by Saudi Arabian Monetary Agency ( SAMA ) and was introduced in 1990.[ 4 ]However, the ESIS was officially replaced by Tadawul in 2001. It is the new securities trading, uncluttering and colonies.

On 2003 the Capital Market Authority was established pursuant to the “ Capital Market Law ” which was formed to oversee over Tadawul. The governments represent the authorities setup which is chiefly responsible for supervising the Saudi Arabian stock market and protect the investors and equity and a unity of the capital market.

1.3 Chart of stock monetary value of Saudi Arabia versus GDP of Saudi Arabia

In this survey we choose market capitalisation and stock value traded as placeholders to stock market in Saudi Arabia.

Figure 1.3.1: Market Capitalization and GDP of Saudi Arabia

Beginnings: universe development index ( WDI )

This chart represents market capitalisation and existent Gross Domestic Product ( GDP ) of Saudi Arabia from twelvemonth 2000 to 2009 severally. Blue line represents GDP of Saudi Arabia while the ruddy line represent for market capitalisation of Saudi Arabia. Growth rate of GDP is more volatile comparison the growing rate of stock monetary value from 2000 until 2009. All through the clip period of growing rate of GDP really volatile. As for stock monetary value, the growing rate is rather unagitated and it remains the same throughout the survey period.

Figure 1.3.2: Stock Value Traded and GDP of Saudi Arabia

Beginnings: universe development index ( WDI )

The chart illustrates the relationship between the growing of stock traded value ( STV ) and the growing of existent Gross Domestic Product ( GDP ) of Saudi Arabia from 2000to 2009. On twelvemonth 2000 to 2002 both STV and GDP growing was increased. But on twelvemonth 2002 until 2005 both are in opposite way. The Riyadh compound bombardments took topographic point on May 12, 2003, in Riyadh and at that place excessively one more large-scale onslaught in Saudi Arabia in 2003. So pupils scared to purchase the stock so the stock monetary value dropped down. The GDP was increased that clip because of the production of oil. Both are dropped down together on twelvemonth 2005. GDP of Saudi Arabia aggressively decreased on twelvemonth 2007 and it starts to increased since 2008.

1.4 Problem Statement

Fiscal market performs an of import function in the economic development procedure ; peculiarly, stock market is one of the indexs in fiscal market. The turning importance of stock market around the universe has opened a new avenue of research into the relationship between stock market and economic growing. The measuring of stock market development is of import because it is the principle for foretelling economic growing.

There have been legion surveies analyzing the connexion between stock market and economic. The economic literature as provided ample grounds that stock monetary value has positive consequence on economic growing. Guha and Mukherjee ( 2008 ) examined positive relationship between stock market development and economic growing. The same thing goes to Shahbaz, Ahmed and Ali ( 2008 ) and Paytatakti Oskooe ( 2010 ) . While Shahnoushi, Ebadi, Danehsvar & A ; Shokri ( 2008 ) and Fase & A ; Abma ( 2003 ) find negative relationship between fiscal market and economic growing.

One of the problematic issues in economic science was the way of the relationship between economic growing and stock market. Blackburn ( 2005 ) advocates a possible two manner causal linkage between fiscal markets and economic growing. However this is has typically happening the causality between stock market and economic growing in Saudi Arabia.

1.5 Research inquiry

What is the way between stock market and economic growing?

What is the is a relationship between development of stock market on economic growing?

1.6 Objective

General aim

The chief aim of this survey is to analyze the impact of stock market on the economic growing in Saudi Arabia.

Specific aim

To find the way of the relationship between the stock market and economic growing.

To analyze the relationship between stock market development and economic growing.

1.7 Significance

This survey covers profoundly into the enhance apprehension of the important relationship and directional of the causality between the similar attack of stock market development and economic growing indexs that will be the chief beginnings for the intent of informations aggregation in this survey. It is clear that if causality can be set uping from stock market to economic growing so these surveies have direct policy deduction and better the effectivity of policy design and execution in future.

This survey provides cognition to investors who are sing puting in Saudi Arabia. By cognizing the relationship between the markets, it can assist investors to fudge some hazard. This survey besides can give some utile information to investing practicians and policy shapers. This survey will be a part to the literature on the subject of stock market and economic growing.

Chapter 2: Literature reappraisal

Fiscal economic expert carried out different surveies on the deductions of stock market development for assorted constituents of an economic system. Valeriano F. Garcia and Lin Liu ( 1990 ) theories suggested that as portion of the fiscal system, the stock markets play of import functions in economic growing. The inquiry whether stock markets promote economic growing is an interesting country to study on. Thus, more recent research on the function of the stock market in an economic system has argued from a different angle. To give assorted dimensions of stock market in an economic system, reappraisal of other surveies is done in this chapter. This reappraisal will concentrate on assorted issues.

To analyse the relationship between stock market and economic growing, there consequences would be positive, negative or no relationship between both. We will reexamine other surveies on the issue in relationship, to happen more inside informations.

The relationship between stock market development and economic growing without sing the function of the banking sector, is the survey done by Levine and Zervos ( 1996 ) . This survey usage pooled transverse state clip series arrested development for 41 states over the period 1976 to 1993. The article includes big figure of control variables such as secondary school registration, the figure of revolution, the ratio of authorities ingestion and outgos, the rising prices rate and black market exchange rate, besides measuring the relationship between stock market development and economic growing. The consequences demoing that stock market development is positively correlated with economic growing by utilizing these variables. Positive relationship consequence between stock market and economic growing is found by King and Levin ( 1993 ) and Levin and Zervos ( 1998 ) . These surveies conclude that states with better development fiscal systems peculiarly those with big efficient Bankss and big good organized and swimmingly working stock market tends to turn much faster.

A strong relationship between stock market and economic growing in Parkistan exist, found by Shahbaz et Al ( 2008 ) . Two new trials, DF-GLS and Ng-Perron are employed in their surveies to happen the relationship. Both commanding variables FDI and HUMAN giving positive relationship between growing, Nowbusting, B.M, and Odit M.P ( 2009 ) besides find positive relationship between stock market and economic growing in Maruriritius. This is replicated in both long tally and short tally equation over the period 1989 to 2006.

Similarly, positive relationship between stock market and economic growing from 1972 to 1978 are found by Kaufman and Jacoby ( 1986 ) . Decrease in stock market ca predate a autumn in the productiveness in six industrialised OECD states, have been concluded. Levine et Al ( 2000 ) , Demirguc-Kunt and Levine ( 1999 ) and World Bank ( 1989 ) do besides concentrate in the relationship between stock market development and growing. Harmonizing to their research they received empirical positive support by utilizing transverse state surveies. These surveies show the relationship and besides province there is strong prognostic power of finance and growing. Chen et Al ( 1986 ) Fama ( 1990 ) , Abdullah and Hayworth ( 1993 ) Gallinger ( 1994 ) and Mukherjee and Naka ( 1995 ) are some of earlier surveies, suggest that stock returns are positively related to existent economic activity.

Beside this, Stiglitz ( 1985 ) found that there is a negative relationship between stock market and economic growing. He argues that developed stock market rapidly expose information through organizing a free rider quandary, alterations in monetary value and dropping investor inducements that who are carryout dearly-won research. Mookerjee ( 1988 ) besides stated that in an Indian economic system, stock market could non utilize as a prima index of existent economic growing activity. There besides no secular ordination can be established between stock monetary values and economic growing from 1960 to 1991 by utilizing the Granger causality trial.

Harris ( 1997 ) besides shows that the relationship between stock market and economic growing is highly weak. Over the period 1980-91, gauging the similar theoretical account for 49 states, by utilizing current investing instead than lagged, and using two-staged least squares. Harris shows that in the instance of the full theoretical account which incorporates with developed and developing states, and of the subsample of developing states, the stock market variable does non offer much incremental explanatory power. Even though the stock market has explanatory power its statistical significance is weak in subsample of developed states.

Argument has arise, that stock market development may ache economic growing. The statement is that stock markets may ache growing as salvaging rate may be negatively affect corporate administration and on a regular basis the presentations of listed companies thereby decelerate down the growing of the stock markets stated by Bhide ( 1993 ) , Shleifer and Vishny ( 1986 ) and Stiglitz ( 1985 ) . Negative correlativity of growing with future stock returns may be attributed to factors closely related to future growing and to countercyclical macroeconomic policy has been claimed by Park ( 1997 ) . For case, a rise in end product growing is normally considered as a mark of future rising prices, which affects negatively future growing and returns. Policymaker may react by raising involvement rates and, therefore cut down future hard currency flow of houses. An alternate path has been propose by the modal through which growing has an impact on future returns after a encouragement in end product, increasing accommodation costs cut down the initial rise in existent stock monetary values. Negative relationship between stock market and economic growing has ben found by Lucas ( 1988 ) . Both are independent and non correlated each other.

Negative relationship between production and future returns focused merely on the U.S. instance has been reported by McQueen and Roley in 1993. The response found here might be the result of an awaited alteration in the pecuniary stance after a rise in the growing rate. This reaction operates as an anti-inflationary policy device via the price reduction rate by raising the cost of capital relation to expected hard currency flow and inducing alterations in future existent returns. It is the first empirical certification of this grounds across a big set of developed economic systems. Negative coefficient of growing rate in the stock is estimated by Blanchard et Al ( 1993 ) . The clip period is from 1951 to 1997.

Liquid market is suggested as low hazard market by Levine and Zervos ( 1998 ) . They found that fiscal assets that traded in this market are less hazardous as it let rescuer to purchase and sell the stock cheaply and rapidly harmonizing to their wish. Can change over liquidness easy from plus into hard currency without immense consequence on the monetary value. In this trading, without a existent consequence on the monetary value, it applies as the capableness to purchase or sell a currency brace. The allotment of capital improves as it is a smaller sum of hazardous assets and easy main course to capital markets, an of import channel of economic growing. Cross state arrested development from 1976 to 1993 has been used by the writer. They argue that fiscal markets may increase growing through liquidness, which makes investing less hazardous, thereby allowed companies to profit from lasting entree to capital liquid equity issues. The same thing goes to Rousseau and Wachtel ( 2000 ) . The possible addition associated with developing deep and liquid fiscal markets is an progressively planetary economic is emphasized in their determination. Both survey demoing that liquidness market positively related to economic growing.

By mobilising nest eggs to investing, administering money to productive sector finance play an of import function in economic growing. Stock market returns have prognostic power for investing end product stated in Barro ( 1990 ) suggested by finance theory. Stock market development is strongly correlated with growing rates of existent GDP per capita said Rousseau and Wachtel. More significantly, they established that stock market liquidness forecast the future growing rate of the economic system when it enters the growing arrested development. This is besides dependable with Fama ( 1981 ) that stock market returns have calculating power for investing end product. Stock market liquidness predicts the future growing rate of the economic system when it enter the growing arrested development is found by Fisher and Merton ( 1984 ) .

Volatility is another of import point of stock market. The built-in volatility of the stock market pricing procedure under developing state conditions make a hapless usher efficient investing allotment is argued by Singh ( 1997 ) . So the stock market volatility could decline macroeconomic instability and thereby non lend to increase growing in developing states. Federer ( 1993 ) besides stated that volatility created inefficient allotment of resources, increased involvement rate and decelerate down the capacity and the productiveness of investing. Therefore, this will cut down the growing of economic.

Schwert ( 1989 ) found that stock market volatility provides of import information about future economic growing, although some writers suggest that economic growing might diminish caused by the volatility of stock market. He excessively stated that in the continuance of fiscal crisis such as the 1987 fiscal market clang, the 1997 East Asia crisis and the 1998 Russian bond equivocation and improbableness period led to stock market volatility addition radically. Campbell et Al ( 2001 ) besides argues that stock market volatility has important prognostic power for existent GDP growing.

King and Levine ( 1993 ) found that a new stock exchange can increase economic growing by aggregating information about house ‘s chances, by investings. Datas from period 1960 to 1989 has been used by the writer. Productivity growing may increase with exist of new stock exchange. North ( 1991 ) argues that the formation of a stock exchange can hike economic growing by take downing the disbursals of interchanging ownership rights in houses. This is an of import portion of some institutional narratives of economical growing. The positive function presented by stock exchanges on the size of latest existent plus investings during ordinary stocks has been emphasize by Benchivenga & A ; Smith ( 1996 ) . Investors easy act upon to put in familiar stocks. This encourages companies to travel to public when they need more finance to put in capital goods.

On the other manus, Bencivenga and Smith ( 1992 ) province that in long tally, new stock market can increase economic growing by cut downing retentions of liquid assets and increasing the growing rate of physical capital. However, a new stock can be negative in short-term because this can increase the family ‘s wealth and raise their contemporary ingestion plenty to temporarily take down the growing rate. Increased stock market integrating can take to greater hazard sharing and therefore a autumn in economic growing has been suggested by Devereux and Smith ( 1994 ) .

Connection between stock market and bank may besides take to the relationship between stock markets and growing. Stock markets and Bankss are evidently utility beginnings. Banks and stock markets lead to increased growing, argued by Arestis ( 2001 ) , nevertheless, that Bankss leads to greater efficiency additions than stock market. The survey observes that stock market has negative effects in Japan, France, UK and Germany in the clip period 1986 to 1998. Stock market leads to greater growing effects than Bankss for 40 states from 1960 to 1985. They find, bank loaning on economic growing has no relationship, but a greater consequence of stock markets on economic growing.

While the function of banking besides brought into Levine and Zervos ( 1998 ) analysis. The consequences suggest that the degree of banking development turns out to be important relationship between stock market development and economic growing after commanding for initial investing in instruction, initial income, political stableness, financial policy, openness trade and macroeconomic stableness. Relationship between stock market, bank and economic growing besides argue by Beck and Levine ( 2004 ) . They specifically find both of stock market and bank development have positive relationship with economic growing, by utilizing panel econometric techniques over the periods 1976 to 1998.

The fact that there exists a strong relationship between fiscal ad economic growing does non needfully connote a causal relationship. The grounds on causality may hold strong bearing on economic policy shapers whether in the signifier of one manner directional causality, bidirectional causality or no directional causality at all. When looking at two manner causal relationship between stock market and economic growth. , Blackburn et Al ( 2005 ) support there is a possible to two manner causal linkages between stock market and economic growing. Harmonizing to them, the being of information abnormality and the effort of both loaners and borrowers to decide multiple enforcement job through the appropriate design of fiscal contacts explain the outgrowth and evolvement of fiscal markets. This procedure explains the positive impact of economic growing on the development of fiscal markets.

Bi directional causal relationship between market capitalisation and economic over the period 1996 to 2007 is find by Deb, S.G. and Mukherjee, J. ( 2008 ) . The bi directional causality between stock market development and economic growing in instance of Pakistan in long tally has been confirmed by Shahbaz, M. et Al ( 2008 ) . But in the short tally, there is merely one manner causality that is from stock market to economic growing over the period 1971 to 2006.

Reasoning comments for literature reappraisal

From the above, it may see that the consequence of stock market and economic growing has been a controversial topic. Some surveies indicated the statistically important consequence of stock market development on economic growing while other did non. Similarly, some reported positive impact of stock liquidness on economic growing. Some argue that stock market volatility has important power on for GDP growing while some did non. Some surveies found new stock exchange can increase economic growing and frailty versa. Some writers besides conclude that stock market lead to greater growing consequence than Bankss while some found Bankss lead to greater efficiency addition than stock market. Finally in way of causality some surveies advocates one manner directional linkage between stock market and economic growing and some conclude bi-directional between both stock market and economic growing. In order to formalize in Saudi Arabia context, no survey has been conducted by utilizing the recent information. This survey hence tests the hypotheses refering stock market development and economic growing in Saudi Arabia.

Chapter 3: Methodology

3.1 Introduction

This subdivision is designed to explicate the methodological analysis and the informations used to accomplish the aim of this survey. This paper chiefly focuses on two issues. First find the relationship between stock market and economic growing and the 2nd aim is to find the way of the causality between stock market and economic growing. In this survey we are utilizing quarterly informations over the period 1999 to 2009 in Saudi Arabia. This survey covers 11 old ages period.

3.2 Theoretical Model

The Solow and endogenous growing theoretical accounts have different deductions for what is, or is non, of import in finding the rate of growing. Using these theoretical accounts as ushers, economic experts have tried to gauge the function of assorted factors suspected of finding the rate of economic growing. There are fundamentally two classs of economic growing theories those based on the traditional Solow ( 1956 ) growing theoretical account and those based on the construct of endogenous growing. This theoretical account predicts that all market-based economic systems will finally make the same changeless growing rate if they have the same rate of technological advancement and population growing.

In the model of the new growing theory, out of the blue few empirical surveies of the relation between stock market and economic growing are available. Levine and Zervos ( 1998 ) who the individual mentioned earlier the of import survey. They are among the first to inquire whether stock market as a casino or a key to economic growing and analyze this issue through empirical observation happening positive and important correlativity between stock market development and long tally growing. Our chief part is to quantitatively measure the function of stock market for growing in Saudi Arabia. Using a new information set on indexs of stock market development of the Tadawul All-Share Index ( TASI ) over the period 1999 to 2009.

3.3 Model specification

Model

GDP = I?0 + I?1MKT CAP + I?2ST + I?3INV + I?4INF + Aµ

Where:

GDP = Real Per Capita GDP Growth

MKT CAP = Market Capitalization

STV =stock traded entire value

INV = foreign direct investing

INF = rising prices

Aµ = mistake term

3.4 Explanation of variable

Stock market development is measured by two placeholders. There is market capitalisation and value traded ratio.

Market capitalisation

Market capitalisation defined by the ratio of market capitalisation to existent GDP. Market capitalisation represents the aggregative value of a company or stock. It is obtained by multiplying the figure of portions outstanding by their current monetary value per portion. This is calculated by spliting the value of listed companies ( market capitalisation ) by GDP or calculated by multiplying a company ‘s sharesA outstanding byA the current market monetary value of one portion.

Stock Traded Value

Liquid defined by the ratio of trading volume to existent GDP. Total value traded divided by GDP gives a step of the liquidness in the market. Market liquidness measures how easy securities can be bought and sold.

Foreign Direct Investment

Foreign direct investing ( FDI ) or foreign investing refers to the net influxs of investing. Foreign direct investing is investing of foreign assets into domestic constructions, equipment, and organisations. It does non include foreign investing into the stock markets.

Inflation

In economic sciences, rising prices is a rise in the general degree of monetary values of goods and services in an economic system over a period of clip by Wikipedia.

3.5 Hypothesis

Hypothesiss divided to two parts in this survey. First hypothesis is to prove the relationship between stock market and economic growing in Saudi Arabia.

H?? : no relationship between GDP and stock market

HA± : there are relationship between GDP and stock monetary value

Hypothesis null represent no cointegration or no relationship between stock market and economic growing. While the alternate represent the relationship between stock market and economic growing in Saudi Arabia.

The 2nd hypothesis is to prove the way of the causality of stock market and economic growing in Saudi Arabia.

H?? : no causing between GDP and stock monetary value

HA± : there are causing between GDP and stock monetary value

The void hypothesis represent for no directional causality of stock market and economic growing. while the alternate hypothesis represent there is unidirectional or bi-directional causality of stock market and economic growing.

3.6 Empirical methodological analysis

Harmonizing to the econterm, unit root trial has to be conducted to trials whether a clip series variable is non-stationary utilizing an autoregressive theoretical account. Augmented Dickey-Fuller ( ADF ) is a good known trial and valid in big samples. This unit root trials are employed to prove for the stationarity of the variables at degree and first difference of each variable. The variables used in this survey are used in the logarithms signifiers.

Follow with the carbon monoxide integrating trial. Johansen ‘s ( 1991 ) cointegration trial is adopted to find whether the additive combination of the series possesses a long tally relationship. The Johansen trial is a process for proving cointegration of several clip series. Although there exists a figure of cointegration trials, such as the Engle and Granger ( 1987 ) trial which based on individual cointegrating relationship, Johansen ‘s trial is more attractive and applicable than the Engle Granger trial.[ 5 ]

Testing for causality is the last portion. In order to prove for causality between stock market and economic growing we utilized the Granger causality trial[ 6 ]. Granger causality is a statistical construct of causality that is based on anticipation. This trial is a statistical hypothesis trial for finding whether one clip series is utile in calculating another.

Harmonizing to the Granger ( 1969 ) causality attack, variable Y is caused by ten or other manner. The 2nd hypothesis is tested in context of:

One manner directional or unidirectional Granger causality from Tadawul All-Share Index ( TASI ) to GDP. In this instance stock market growing increases the economic system growing but non frailty versa.

One manner directional or unidirectional Granger causality from GDP to TASI. In this instance the growing rate of economic system increases the stock market development but non frailty versa.

Two manner directional or bi-directional causality. In this instance the growing rate of stock market ( TASI ) increases the growing rate of GDP and frailty versa.

3.7 Datas beginnings

The informations are collected from World Development Indicator ( WDI ) and International Financial Statistic ( IFS ) . The empirical consequence will show in this survey based on quarterly informations. The sample under probe covers the period 1999 to 2009 for Saudi Arabia.

A

Augmented Dickey-Fuller

A

A

A

Degree

A

1ST DIFF

A

Volt-ampere

INT

T/INT

INT

T/INT

gross domestic product

-2.578353 ( 0.110 )

-2.618367 ( 0.276 )

-4.312659 ( 0.002 ) ***

-4.203317 ( 0.0140 ) **

market capitalisation

-1.715866 ( 0.413 )

-1.290589 ( 0.871 )

-7.755151 ( 0.000 ) ***

-7.580888 ( 0.000 ) ***

stock traded value

-2.454152 ( 0.136 )

-1.836832 ( 0.656 )

-4019055 ( 0.005 ) ***

-4065759 ( 0.020 ) **

investing

2-0.721505 ( 0.828 )

-1.998807 ( 0.577 )

-2.836336 ( 0.068 ) *

-2.860830 ( 0.0191 ) **

rising prices

-1.814008 ( 0.366 )

-1.312579 ( 0.862 )

-4.025065 ( 0.005 ) ***

-3.729260 ( 0.039 ) **Chapter 4: Empirical Consequence

Table 1: Unit of measurement Root Test

Notes: LRGDP, LCAP, LSTV, LINV, LINF are Real Per Capital GDP growing, Market Capitalization, Stock Trade Value, Foreign Direct Investment and Inflation severally. While ( * ) , ( ** ) and ( *** ) shows significance at 10

While ( * ) , ( ** ) and ( *** ) shows significance at 10 % , 5 % and 1 % degree.

The consequences from Augmented Dickey Fuller unit root trials are summarized in Table 1. This 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: 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

A 76.97277

A 44.10069

A 34.80587

At most 1

A 46.20667

54.07904

A 20.46148

28.58808

At most 2

25.74519

A 35.19275

15.60178

22.29962

At most 3

10.14341

20.26184

A 6.480008

A 15.89210

At most 4

3.663397

9.164546

3.663397

A 9.164546

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

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

Table 2 returns with the Johansen carbon monoxide integrating trial for Saudi Arabia. The Johansen trial is a process for proving co integrating of several clip series. It is by and large more applicable than the Engle Granger trial which based on individual carbon monoxide incorporating relationship. 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.[ 7 ]

In this survey Johansen carbon monoxide integrating trial is used to corroborate if there is long tally relationship between existent per capital GDP, market capitalisation, stock traded value, foreign direct investing and rising prices. The choice standard is a combination of Akaike ‘s information standard. Both the Trace and Max-Eigen trials support that there exists cointegrating vector among the variables in Saudi Arabia.

Co integration Equations

This equation explain the cointegration relationship between GDP, market capitalisation, stock traded value, foreign investing and rising prices for Saudi Arabia can be expressed as:

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

Table 3 shows Co integrating trial. We proceed this trial to place the being of long-term relationship between the variables. The above equation 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 ( INF ) .

The consequences show that market capitalisation is undistinguished but positively related to existent per capital GDP growing. This suggests that as market capitalisation additions, existent per capital GDP growing additions. While, stock traded value ( STV ) is important and positively related to existent per capital GDP growing. This suggests that as stock traded volume additions, existent per capital GDP growing besides increases. This consequence implies that stock market development lead growing in Saudi Arabia.

Furthermore, foreign direct investing ( INV ) is important but 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.

Therefore, we conclude that there is grounds of long-term relationship between stock monetary value and GDP of Saudi Arabia. Both placeholder of stock market, market capitalisation and stock traded value are positively related to the GDP growing. The consequences indicate that the void hypothesis of no cointegration can be rejected in that period.

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

3.28025

( 0.0391 )

0.81741

( 0.4969 )

Yes

NO

INV

RGDC

RGDP C

INV

3

3

7.01483

( 0.0075 )

0.26177

( 0.8522 )

Yes

NO

INF

RGDPC

RGDP

INF

3

3

5.40892

( 0.0480 )

0.09025

( 0.9647 )

Yes

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

5.29696

( 0.0166 )

0.72827

( 0.5826 )

Yes

NO

INV

RGDC

RGDP C

INV

4

4

6.00559

( 0.0099 )

0.27883

( 0.8884 )

Yes

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 ) .

Further more tabular arraies 4 and 5 nowadayss Granger causality consequences. These tabular arraies included dependent variables, forecaster variables, slowdown length, F-test and the being or extinction of Granger causality. Lag length 3 and 4 are used for comparing intents.

Sing to the empirical consequence which presenting in table 4 and table 5, the void hypothesis that the stock monetary values do non Granger do economic growing is rejected at 5 % significance degree at stock traded value for slowdown 3 and lag 4 and corroborate the being of causal link running from stock monetary value motions to economic growing but frailty versa for the opposite way. As a consequence unidirectional causality relationship between stock monetary value and economic growing in Saudi Arabia is confirmed with stock traded value. But it is another manner to the market capitalisation. By the manner for the market capitalisation the both lag 3 and 4 show there are no Granger causality between stock monetary value and GDP of Saudi Arabia.

While causal link between foreign direct investing and rising prices with GDP is exists at slowdown 3. Both shows there are merely one manner directional. But in lag 4, Granger causality merely exists in foreign direct investing non to rising prices.

Chapter 5: Decision

This subdivision designed to briefly sum up the survey. Other than that, for policy deduction intents and in conclusion for the recommendation.

This survey through empirical observation investigates the causal links between stock market and economic growing in Saudi Arabia. The sample period was used is from 1999 to 2009 and the information was quarterly clip series informations. This survey included Augmented Dickey Fuller trial, Johansen cointegration trial and Granger causality trial.

The consequences from the Johansen cointegration trial indicate that economic growing is influenced by the stock monetary value motions in the long tally. Both proxy to the stock market, market capitalisation and stock traded value are positively related to the GDP of Saudi Arabia. This suggests that as market capitalisation addition, existent per capital GDP growing addition. Similarly, stock traded value addition, existent per capital GDP addition. This survey besides stated that foreign direct investing ( INV ) and rising prices rate are negatively related to existent per capital GDP growing of Saudi Arabia. So this proposes that when foreign direct investing and rising prices rate addition, existent per capital GDP growing will be lessening.

On the other manus, causal relationship exists between stock traded value and economic growing in slowdown 3 and 4. It shows unidirectional causing ; stock traded value led economic growing in Saudi Arabia. But it non exists between market capitalisation and GDP in both slowdowns.

Policy deduction

However it showed that the stock value traded one of the placeholder to the stock market growing Granger do the economic growing in both slowdowns. Hence, for policy deduction intents, we can propose that Saudi Arabia authorities can advance stock market in order to advance economic of the state as the stock market can be served as a prima index for economic intents.

In order to advance stock market development, it is of import to promote nest eggs by appropriate inducements, to better stock market liquidness, to develop fiscal mediators and to command rising prices.

Recommendation

The demand for farther research is obvious in order to acquire more grounds about the impact of stock markets on economic growing or frailty versa.