IDEAS home Printed from https://ideas.repec.org/p/rdg/emxxdp/em-dp2020-27.html
   My bibliography  Save this paper

The Macroeconomy, Oil and the Stock Market: A Multiple Equation Time Series Analysis of Saudi Arabia

Author

Listed:
  • Ruqayya Aljifri

    (Department of Economics, University of Reading)

Abstract

This study investigates the existence of long-run relationship/s among the Saudi stock price index (TASI) and domestic macroeconomic variable of money supply (M2), the international variable of S&P 500 and global variable of oil prices, using quarterly data from 1988 quarter 1 to 2018 quarter 1. We also used local and global events dummy variables to control for the impact of local (the 2004 and 2005 TASI bubble that followed by the 2006 crash) and global (the 2008 financial crisis) events, making this paper the first study that takes into account the impact of the local and global financial crisis events when examining the relationship between TASI and macroeconomic variables. We applied the vector error correction model with dummy variables and variance decomposition for long-run analysis. We also applied the Indicator Saturation method to detect outliers and structural breaks. Findings show that there exists a long-run relationship between all of the variables in the system. The equilibrium relation between TASI and S&P 500 and oil prices is positive. However, the relationship between TASI and money supply is negative. Moreover, TASI is substantially driven by innovations in oil prices, and to a lesser extent, by money supply and S&P 500, respectively.

Suggested Citation

  • Ruqayya Aljifri, 2020. "The Macroeconomy, Oil and the Stock Market: A Multiple Equation Time Series Analysis of Saudi Arabia," Economics Discussion Papers em-dp2020-27, Department of Economics, University of Reading.
    • Handle: RePEc:rdg:emxxdp:em-dp2020-27
    as

    Download full text from publisher

    File URL: http://www.reading.ac.uk/web/FILES/economics/emdp202027.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Basher, Syed Abul & Haug, Alfred A. & Sadorsky, Perry, 2012. "Oil prices, exchange rates and emerging stock markets," Energy Economics, Elsevier, vol. 34(1), pages 227-240.
    2. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
    3. Mr. Ahmed I Al-Darwish & Naif Alghaith & Mr. Alberto Behar & Mr. Tim Callen & Mr. Pragyan Deb & Mr. Amgad Hegazy & Padamja Khandelwal & Ms. Malika Pant & Mr. Haonan Qu, 2015. "Saudi Arabia: Tackling Emerging Economic Challenges to Sustain Strong Growth," IMF Departmental Papers / Policy Papers 2015/003, International Monetary Fund.
    4. repec:cup:cbooks:9781108422536 is not listed on IDEAS
    5. Marczak, Martyna & Proietti, Tommaso, 2016. "Outlier detection in structural time series models: The indicator saturation approach," International Journal of Forecasting, Elsevier, vol. 32(1), pages 180-202.
    6. Park, Jungwook & Ratti, Ronald A., 2008. "Oil price shocks and stock markets in the U.S. and 13 European countries," Energy Economics, Elsevier, vol. 30(5), pages 2587-2608, September.
    7. Nurasyikin Jamaludin & Shahnaz Ismail & Syamimi Ab Manaf, 2017. "Macroeconomic Variables and Stock Market Returns: Panel Analysis from Selected ASEAN Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 37-45.
    8. Gulser Meric & Christine Lentz & Wayne Smeltz & Ilhan Meric, 2012. "International Evidence on Market Linkages After the 2008 Stock Market Crash," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 6(4), pages 45-57.
    9. Arifur Khan & Mohammad Muttakin & Javed Siddiqui, 2013. "Corporate Governance and Corporate Social Responsibility Disclosures: Evidence from an Emerging Economy," Journal of Business Ethics, Springer, vol. 114(2), pages 207-223, May.
    10. Hassan, Gazi & Hisham, Al refai, 2010. "Can Macroeconomic Factors Explain Equity Returns in the Long Run? The Case of Jordan," MPRA Paper 22713, University Library of Munich, Germany.
    11. Masih, Rumi & Peters, Sanjay & De Mello, Lurion, 2011. "Oil price volatility and stock price fluctuations in an emerging market: Evidence from South Korea," Energy Economics, Elsevier, vol. 33(5), pages 975-986, September.
    12. Haruna Issahaku & Yazidu Ustarz & Paul Bata Domanban, 2013. "Macroeconomic Variables and Stock Market Returns in Ghana: Any Causal Link?," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 3(8), pages 1044-1062.
    13. Greenwood, Jeremy & Smith, Bruce D., 1997. "Financial markets in development, and the development of financial markets," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 145-181, January.
    14. Bahmani-Oskooee, Mohsen & Hajilee, Massomeh, 2013. "Exchange rate volatility and its impact on domestic investment," Research in Economics, Elsevier, vol. 67(1), pages 1-12.
    15. Asli Demirgüç-Kunt & Ross Levine (ed.), 2018. "Finance and Growth," Books, Edward Elgar Publishing, number 17120.
    16. Arestis, Philip & Demetriades, Panicos O & Luintel, Kul B, 2001. "Financial Development and Economic Growth: The Role of Stock Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(1), pages 16-41, February.
    17. Arshanapalli, Bala & Doukas, John & Lang, Larry H. P., 1995. "Pre and post-October 1987 stock market linkages between U.S. and Asian markets," Pacific-Basin Finance Journal, Elsevier, vol. 3(1), pages 57-73, May.
    18. Amalendu Bhunia & Devrim Yaman, 2017. "Is There a Causal Relationship Between Financial Markets in Asia and the US?," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 22(1), pages 71-90, Jan-June.
    19. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    20. Abhay Abhyankar, Bing Xu, and Jiayue Wang, 2013. "Oil Price Shocks and the Stock Market: Evidence from Japan," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    21. Walter Enders & Todd Sandler & Khusrav Gaibulloev, 2011. "Domestic Versus Transnational Terrorism: Data, Decomposition, and Dynamics," Journal of Peace Research, Peace Research Institute Oslo, vol. 48(3), pages 319-337, May.
    22. Simon N. Wood, 2011. "Fast stable restricted maximum likelihood and marginal likelihood estimation of semiparametric generalized linear models," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 73(1), pages 3-36, January.
    23. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    24. Nidhaleddine Ben Cheikh & Sami Ben Naceur & Oussama Kanaan & Christophe Rault, 2018. "Oil Prices and GCC Stock Markets: New Evidence from Smooth Transition Models," CESifo Working Paper Series 7072, CESifo.
    25. Saqib Sharif, 2019. "How foreign investors influence stock markets? The Saudi Arabian experience," Middle East Development Journal, Taylor & Francis Journals, vol. 11(1), pages 105-123, January.
    26. Carlos Santos & David Hendry & Soren Johansen, 2008. "Automatic selection of indicators in a fully saturated regression," Computational Statistics, Springer, vol. 23(2), pages 317-335, April.
    27. Eun, Cheol S. & Shim, Sangdal, 1989. "International Transmission of Stock Market Movements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(2), pages 241-256, June.
    28. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-565, September.
    29. Durga Prasad Samontaray & Sultan Nugali & Bokkasam Sasidhar, 2014. "A Study of the Effect of Macroeconomic Variables on Stock Market: Saudi Perspective," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 5(4), pages 120-127, October.
    30. Kiran Kumar Kotha & Bhawna Sahu, 2016. "Macroeconomic Factors and the Indian Stock Market: Exploring Long and Short Run Relationships," International Journal of Economics and Financial Issues, Econjournals, vol. 6(3), pages 1081-1091.
    31. Sandrine Jacob Leal, 2015. "Fundamentalists, chartists and asset pricing anomalies," Quantitative Finance, Taylor & Francis Journals, vol. 15(11), pages 1837-1850, November.
    32. Johansen, Soren, 1992. "Testing weak exogeneity and the order of cointegration in UK money demand data," Journal of Policy Modeling, Elsevier, vol. 14(3), pages 313-334, June.
    33. James H. Stock & Mark W. Watson, 2001. "Vector Autoregressions," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 101-115, Fall.
    34. Geske, Robert & Roll, Richard, 1983. "The Fiscal and Monetary Linkage between Stock Returns and Inflation," Journal of Finance, American Finance Association, vol. 38(1), pages 1-33, March.
    35. Kanjilal, Kakali & Ghosh, Sajal, 2017. "Dynamics of crude oil and gold price post 2008 global financial crisis – New evidence from threshold vector error-correction model," Resources Policy, Elsevier, vol. 52(C), pages 358-365.
    36. Haruna Issahaku & Yazidu Uztarz & Paul Bata Domanban, 2013. "Macroeconomic Variables and Stock Market Returns in Ghana: Any Causal Link?," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 3(8), pages 1044-1062, August.
    37. Schuppli, Michael & Bohl, Martin T., 2010. "Do foreign institutional investors destabilize China's A-share markets?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(1), pages 36-50, February.
    38. Muhammad S Al-Jasser & Ahmed Banafe, 2002. "The development of debt markets in emerging economies: the Saudi Arabian experience," BIS Papers chapters, in: Bank for International Settlements (ed.), The development of bond markets in emerging economies, volume 11, pages 178-182, Bank for International Settlements.
    39. Peter Sellin, 2001. "Monetary Policy and the Stock Market: Theory and Empirical Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 15(4), pages 491-541, September.
    40. Mukherjee, Tarun K & Naka, Atsuyuki, 1995. "Dynamic Relations between Macroeconomic Variables and the Japanese Stock Market: An Application of a Vector Error Correction Model," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 18(2), pages 223-237, Summer.
    41. Wang, Yudong & Wu, Chongfeng & Yang, Li, 2013. "Oil price shocks and stock market activities: Evidence from oil-importing and oil-exporting countries," Journal of Comparative Economics, Elsevier, vol. 41(4), pages 1220-1239.
    42. Brooks,Chris, 2019. "Introductory Econometrics for Finance," Cambridge Books, Cambridge University Press, number 9781108436823.
    43. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
    44. Sandrine Jacob Leal, 2015. "Fundamentalists, Chartists and Asset pricing anomalies," Post-Print hal-01508002, HAL.
    45. Abdulnasser Hatemi-J, 2012. "Asymmetric causality tests with an application," Empirical Economics, Springer, vol. 43(1), pages 447-456, August.
    46. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    47. Favero, Carlo A., 2001. "Applied Macroeconometrics," OUP Catalogue, Oxford University Press, number 9780198296850.
    48. Tarun K. Mukherjee & Atsuyuki Naka, 1995. "Dynamic Relations Between Macroeconomic Variables And The Japanese Stock Market: An Application Of A Vector Error Correction Model," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 18(2), pages 223-237, June.
    49. Vasilev, Aleksandar & Maksumov, Rashid, 2010. "Critical analysis of Chapter 23 of Keynes’s Notes on Mercantilism in The General Theory of Employment, Interest and Money (1936)," EconStor Research Reports 155318, ZBW - Leibniz Information Centre for Economics.
    50. Lakshmi Kalyanaraman & Basmah Al Tuwajri, 2014. "Macroeconomic Forces and Stock Prices: Some Empirical Evidence from Saudi Arabia," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 5(1), pages 81-92, January.
    51. Shahrestani, Parnia & Rafei, Meysam, 2020. "The impact of oil price shocks on Tehran Stock Exchange returns: Application of the Markov switching vector autoregressive models," Resources Policy, Elsevier, vol. 65(C).
    52. Andreas Humpe & Peter Macmillan, 2009. "Can macroeconomic variables explain long-term stock market movements? A comparison of the US and Japan," Applied Financial Economics, Taylor & Francis Journals, vol. 19(2), pages 111-119.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mohammed H. Alamoudi & Omer A. Bafail, 2022. "BWM—RAPS Approach for Evaluating and Ranking Banking Sector Companies Based on Their Financial Indicators in the Saudi Stock Market," JRFM, MDPI, vol. 15(10), pages 1-20, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bhuiyan, Erfan M. & Chowdhury, Murshed, 2020. "Macroeconomic variables and stock market indices: Asymmetric dynamics in the US and Canada," The Quarterly Review of Economics and Finance, Elsevier, vol. 77(C), pages 62-74.
    2. Onneetse L Sikalao-Lekobane, 2014. "Do Macroeconomic Variables Influence Domestic Stock Market Price Behaviour in Emerging Markets? A Johansen Cointegration Approach to the Botswana Stock Market," Journal of Economics and Behavioral Studies, AMH International, vol. 6(5), pages 363-372.
    3. Hosseini, Seyed Mehdi & Ahmad, Zamri & Lai, Yew Wah, 2011. "The Role of Macroeconomic Variables on Stock Market Index in China and India," MPRA Paper 112215, University Library of Munich, Germany.
    4. Mirza Muhammad Naseer & Muhammad Asif Khan & József Popp & Judit Oláh, 2021. "Firm, Industry and Macroeconomics Dynamics of Stock Returns: A Case of Pakistan Non-Financial Sector," JRFM, MDPI, vol. 14(5), pages 1-18, April.
    5. Rudra P. PRADHAN & Mak B. ARVIN & Bele SAMADHAN & Shilpa TANEJA, 2013. "The Impact of Stock Market Development on Inflation and Economic Growth of 16 Asian Countries: A Panel VAR Approach," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 13(1), pages 203-218.
    6. Kishor K. Guru-Gharana & Matiur Rahman & Anisul M. Islam, 2021. "Japan s Stock Market Performance: Evidence from Toda-Yamamoto and Dolado-Lutkepohl Tests for Multivariate Granger Causality," International Journal of Economics and Financial Issues, Econjournals, vol. 11(3), pages 107-122.
    7. Abbas Ghulam & Wang Shouyang & Bhowmik Roni & Koju Laxmi, 2017. "Cointegration and Causality Relationship Between Stock Market, Money Market and Foreign Exchange Market in Pakistan," Journal of Systems Science and Information, De Gruyter, vol. 5(1), pages 1-20, February.
    8. Jiranyakul, Komain, 2009. "Economic Forces and the Thai Stock Market, 1993-2007," MPRA Paper 57368, University Library of Munich, Germany.
    9. Maysami, Ramin Cooper & Koh, Tiong Sim, 2000. "A vector error correction model of the Singapore stock market," International Review of Economics & Finance, Elsevier, vol. 9(1), pages 79-96, February.
    10. Alexander Schätz, 2010. "Macroeconomic Effects on Emerging Market Sector Indices," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 9(2), pages 131-169, August.
    11. Ahmad Hamidi, Hakimah Nur & Khalid, Norlin & Abdul Karim, Zulkefly, 2018. "Revisiting Relationship Between Malaysian Stock Market Index and Selected Macroeconomic Variables Using Asymmetric Cointegration," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 52(1), pages 311-319.
    12. Fromentin, Vincent, 2022. "Time-varying causality between stock prices and macroeconomic fundamentals: Connection or disconnection?," Finance Research Letters, Elsevier, vol. 49(C).
    13. Mohammed Nishat & Rozina Shaheen, 2004. "Macroeconomic Factors and Pakistani Equity Market," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 43(4), pages 619-637.
    14. Wongbangpo, Praphan & Sharma, Subhash C., 2002. "Stock market and macroeconomic fundamental dynamic interactions: ASEAN-5 countries," Journal of Asian Economics, Elsevier, vol. 13(1), pages 27-51.
    15. Le, Thai-Ha & Chang, Youngho, 2015. "Effects of oil price shocks on the stock market performance: Do nature of shocks and economies matter?," Energy Economics, Elsevier, vol. 51(C), pages 261-274.
    16. Donggyu Lee & Jungho Baek, 2018. "Stock Prices of Renewable Energy Firms: Are There Asymmetric Responses to Oil Price Changes?," Economies, MDPI, vol. 6(4), pages 1-8, November.
    17. Chu, Patrick Kuok-Kun, 2011. "Relationship between macroeconomic variables and net asset values (NAV) of equity funds: Cointegration evidence and vector error correction model of the Hong Kong Mandatory Provident Funds (MPFs)," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(5), pages 792-810.
    18. Adam, Anokye M. & Tweneboah, George, 2008. "Do macroeconomic variables play any role in the stock market movement in Ghana?," MPRA Paper 9357, University Library of Munich, Germany, revised 2008.
    19. Širůček, Martin, 2015. "Kauzalní vztah peněžní nabídky a amerického akciového trhu [Money supply and US stock market causality]," MPRA Paper 66357, University Library of Munich, Germany, revised 30 Aug 2015.
    20. K. Latha & Sunita Gupta & Arnav Kumar, 2016. "Relationship between Indian Stock Market Performance and Macroeconomic Variables: An Empirical Study," International Journal of Financial Markets, Research Academy of Social Sciences, vol. 2(4), pages 109-121.

    More about this item

    Keywords

    TASI; macroeconomic variables; the TASI bubble and the crash; the global financial crisis; VECM; cointegration test; Indicator Saturation; variance decompositions;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rdg:emxxdp:em-dp2020-27. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Alexander Mihailov (email available below). General contact details of provider: https://edirc.repec.org/data/derdguk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.