Does stock market development and COVID-19 pandemic lead to financial crisis: the case of largest Islamic stock exchange market?

This research investigates the short- and long-term effect of COVID-19 pandemic period and the largest Islamic stock market development (SMD) in term of size and market activity (turnover) on financial crises (FCs) indicator and identifies the Granger–causality relationship exist between them. We apply an autoregressive distributed lag technique analysis method in estimating short- and long-run models of this relationship, using 34 monthly observations, from 2018M1 to 2020M10 Islamic stock market of Kingdom of Saudi Arabia (KSA). The short-term result implies that the FC indicator had significant positively affected by the COVID-19 pandemic. However, the long-run model result shows that market size indicator leads to a major FC, while market trade value indicator has negative impact on FC indicator in KSA Tadawul market. In addition, the results show that the only market capital indicator Granger–causes FCs. We concluded that the Saudi policymakers should make new regulations to avoid the negative effect of FC, in order for the growth of its stock market size and trade, for the stability of financial economic in Saudi Arabia. They should add more support to stock market trading to eliminate the potential threat of FC. We believe this is the first empirical study that investigates the short- and long-term effect of SMD, in terms of size and activity development on the FCs volatility in largest Islamic stock exchange market without ignoring the potential effect of COVID-19 pandemic. Also, this research is novel in terms of studying a market that was previously closed to outsiders and has implemented various financial sector reforms in recent years.