Stock Markets And Economic Crisis In Saudi Arabia Economics Essay
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 foretell the economic system has been widely debated. Those who support the market ‘s prognostic ability argue that the stock market is advanced and current monetary values reflect the future net incomes possible or profitableness of companies. Since stock monetary values reflect outlooks about profitableness and since profitableness is straight linked to economic activity, fluctuations in stock monetary values are thought to take the way of the economic system.
The subprime crisis that began in August 2007 in the USA has been labeled as the worst fiscal crisis since the Great Depression. The crisis has developed into the largest fiscal daze, impacting heavy harm on markets and establishments at the nucleus of the planetary fiscal system ( IMF 2008 ) . 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.
1.1.1 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 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.
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.
1.2.3 Stock Market of Saudi Arabia
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.
In 1984, a Ministerial Committee dwelling of Ministry of Finance and National Economy, Ministry of Commerce and Saudi Arabian Monetary Agency, SAMA was formed to modulate and develop the market. With the purpose of bettering the regulative model, portion trading intermediation was restricted to commercial Bankss. In 1984, the Saudi Share Registration Company ( SSRC ) was established by the commercial Bankss. The company provides cardinal enrollment installations for joint stock companies and settees all equity minutess. Automated glade and Settlement was introduced in 1989.
The Electronics Securities Information System ( ESIS ) , developed and operated by SAMA, was introduced in 1990. Tadawul, the new securities trading, uncluttering and colonies was launched in October 2001. On 2003 the Capital Market Authority was established pursuant to the “ Capital Market Law ” . The authorization represents the authorities setup which is chiefly entrusted with direction and organisation of the Saudi Capital Market. The development of this portion market is to protect the investors and equity and a unity of the capital market. The stock market index of the Saudi Stock Exchange, the Tadawul All-Share Index ( TASI ) is turning by springs and bounds every financial twelvemonth and the Saudi Stock Exchange is soon ranked 11th in the universe in footings of market capitalisation.
Chart of stock monetary value of Saudi Arabia versus GDP of Saudi Arabia
The chart illustrates the relationship between the growing rate of GDP and stock monetary value of Saudi Arabia. Growth rate of GDP is more volatile comparison the growing rate of stock monetary value from 1991 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 from 1991 to 2003. Get downing from 2004 the stock monetary value of Saudi Arabia start to increase and aggressively drop down on 2006 and it demoing volatile although the clip period after 2004.
1.3 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.
1.4 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?
The chief aim of this survey is to analyze the impact of stock market on the economic growing in Saudi Arabia.
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.
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
Different surveies have been carried out by fiscal economic expert on the deductions of stock market development for assorted constituents of an economic system. Similarly the early theories of Valeriano F. Garcia and Lin Liu ( 1991 ) suggest that as portion of the fiscal system, the stock markets play of import functions in economic growing. Therefore, more recent research on the function of the stock market in an economic system has argued from a different angle. Review of other surveies will be done in this chapter to give assorted dimensions of stock market in an economic system. 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. To happen more inside informations, we will reexamine other surveies on the issue in relationship.
The survey by Levine and Zervos ( 1996 ) is among that considered the relationship between stock market development and economic growing without sing the function of the banking sector. This survey usage pooled transverse state clip series arrested development for 41 states over the period 1976 to 1993. While measuring the relationship between stock market development and economic growing, the article besides 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. By utilizing these variables the consequence demoing that stock market development is positively correlated with economic growing. King and Levin ( 1993 ) and Levin and Zervos ( 1998 ) have found positive relationship consequence between stock market and economic growing. These surveies claim that states with better developed fiscal systems peculiarly those with big efficient Bankss and a big good organized and swimmingly working stock markets tend to turn much faster.
Similarly, Shahbaz et Al. ( 2008 ) find that there exist a really strong relationship between stock market development and economic growing in Pakistan. In order to happen the relationship they employed two new trials, DF-GLS and Ng-Perron in their survey. Eventhough both commanding variables FDI and HUMAN giving positive relationship between growing, Nowbutsing, B. M. and Odit M. P. ( 2009 ) besides find positive relationship between stock market and economic growing in Maruritius. This is replicated in both long tally and short tally equations over the period 1989 to 2006.
Similarly, Kaufman and Jacoby ( 1986 ) found positive relationship between stock market and economic growing from 1972 to 1978. They conclude that lessening in stock market can predate a autumn in the productiveness in six industrialised OECD states. Levine et Al. ( 2000 ) , Demirguc-Kunt and Levine ( 1999 ) and World Bank ( 1989 ) do besides concentrate in the relationship between growing and stock market development. Harmonizing to their research they received empirical positive support by utilizing transverse state surveies. These surveies non merely demo the relationship but they besides stated there is strong prognostic power of finance and growing. Numerous earlier surveies, such as Chen et Al. ( 1986 ) , Fama ( 1990 ) , Abdullah and Hayworth ( 1993 ) , Gallinger ( 1994 ) and Mukherjee and Naka ( 1995 ) , suggest that stock returns are positively related to existent economic activity.
Beside this, Stiglitz ( 1985 ) found that there is negative relationship between stock market and economic growing. He excessively argues that developed stock markets rapidly reveal information through monetary value alterations, making a free rider job and cut downing investor inducements to pass resources to carry on dearly-won hunt. Harris ( 1997 ) shows that this relationship is at best weak. Reestimating the same theoretical account for 49 states over the period 1980-91, but utilizing current investing instead than lagged, and using two-stage least squares, he demonstrates that in the instance of the full sample which includes both developed and developing states, and of the subsample of developing states, the stock market variable does non offer much incremental explanatory power. In the subsample of developed states, although the degree of stock market activity has some explanatory power, its statistical significance is weak.
Some have argued that stock market development may ache economic growing. The statement is that stock markets may ache growing as salvaging rate may be reduced due to outwardnesss in capital accretion. Furthermore, diffuse ownership may negatively impact corporate administration and constantly the public presentation of listed houses thereby hindering the growing of the stock markets stated by Bhide, ( 1993 ) , Shleifer & A ; Vishny ( 1986 ) and Stiglitz ( 1985 ) . Park ( 1997 ) has claimed that the negative correlativity of growing with future stock returns may be attributed to factors closely related to future growing and to countercyclical macroeconomic policy. 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. Policymakers may react by raising involvement rates and, therefore, cut down future hard currency flows of houses. The theoretical account proposes an alternate path 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. Lucas ( 1988 ) found that there in negative relationship between stock market and economic growing. Both are independent and non correlated each other.
McQueen and Roley ( 1993 ) describing a negative relationship between production and future returns focused merely on the U.S. instance. 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 flows and bring oning alterations in future existent returns. To our cognition, this is the first empirical certification of this grounds across a big set of developed economic systems. The same thing goes to Blanchard et Al. ( 1993 ) estimates negative coefficient of growing rate in the stock. The clip period is from 1951 to 1997.
Levine and Zervos ( 1998 ) , suggest that liquidness market is low hazard market. They find that fiscal assets that traded in this market are less hazardous because it let rescuer to purchase and sell the stock cheaply and rapidly harmonizing to their wish. Liquid is the ability to rapidly change over an plus into hard currency without a large consequence on the monetary value. In this trading, it applies as the ability to purchase or sell a currency brace without a existent consequence on the monetary value. Less hazardous assets and easy entree to capital markets improve the allotment of capital, an of import channel of economic growing. The writer used transverse state arrested development from the period 1976 to 1993. They argue that stock markets may heighten growing through liquidness, which makes investing less hazardous, thereby enabling companies to bask lasting entree to capital through liquid equity issues. The same thing goes to Rousseau and Wachtel ( 2000 ) . Their findings stress the possible additions associated with developing deep and liquid fiscal markets in an progressively planetary economic system. Both survey demoing that liquidness market positively related to economic growing.
By mobilising nest eggs to investing, administering money to productive sectors finance play an of import function in economic growing. . Finance theory suggests that stock market returns have prognostic power for investing end product stated in Barro ( 1990 ) . Rousseau and Wachtel ( 2000 ) besides said that stock market development is strongly correlated with growing rates of existent GDP per capita. More significantly, they established that stock market liquidness predict the future growing rate of the economic system when it enter the growing arrested development. This is besides dependable with Fama ( 1981 ) that stock market returns have prognostic power for investing end product. The statement by Fisher and Merton ( 1984 ) besides found that stock market liquidness predict the future growing rate of the economic system when it enter the growing arrested development.
Another of import point of stock market is volatility. Singh ( 1997 ) argues that the built-in volatility of the stock market pricing procedure under developing state conditions make a hapless usher efficient investing allotment. So the stock market volatility could decline macroeconomic instability and thereby non lend to increase growing in developing states. Similarly, 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.
Although some writers suggest that stock market volatility might cut down economic growing, Schwert ( 1989 ) found that stock market volatility provides of import information about future economic growing. He besides stated that stock market volatility tends to increase dramatically during fiscal crisis such as the 1987 stock market clang, the 1997 East Asia crisis, and the 1998 Russian bond default and periods of uncertainness. Campbell et Al. ( 2001 ) besides argues that stock market volatility has important prognostic power for existent GDP growing. These writers show that after commanding the dependent variables, the stock market volatility still has important prognostic power for 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. The writer used informations from period 1960 to 1989. Productivity growing may increase with exist of new stock exchange. Similarly, North ( 1991 ) besides 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 economic growing. Benchivenga & A ; Smith ( 1996 ) stress the positive function provided by stock exchanges on the size of new existent plus investings through common stocks. 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 the 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. Devereux and Smith ( 1994 ) suggest that increased stock market integrating can take to greater hazard sharing and therefore a autumn in economic growing.
The relationship between stock markets and growing may besides be influenced by the nexus between stock markets and Bankss. Stock markets and Bankss are clearly utility beginnings. Arestis ( 2001 ) argue that both Bankss and stock markets lead to increased growing, nevertheless, that Bankss lead 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 1968 to 1998. While Atje and Jovanovic ( 1993 ) conclude that stock markets lead to greater growing effects than Bankss for 40 states from 1960 to 1985. They find no relationship for bank loaning on economic growing but a big 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 in explicating economic growing. They besides find that there is strong and 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. Similarly Beck and Levine ( 2004 ) argue the relationship between stock market, bank and economic growing. By utilizing panel econometric techniques over the period 1976 to 1998, they specifically find both of stock market and bank development have positive relationship with economic growing.
The fact that there exists a strong relationship between fiscal and 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, bi-directional causality or no directional causality at all. When looking at two manner causal relationship between stock market and economic growing, Blackburn et. Al ( 2005 ) support there is a possible to two manner causal linkages between stock markets and economic growing. Harmonizing to them, the being of information abnormality and the effort of both loaners and borrowers to decide multiple enforcement jobs through the appropriate design of fiscal contracts explain the outgrowth and evolvement of fiscal markets. This procedure explains the positive impact of economic growing on the development of fiscal markets.
Similarly Deb, S. G. and Mukherjee, J. ( 2008 ) besides find bi directional causal relationship between market capitalisation and economic growing for the Indian economic over the period 1996 to 2007. While Shahbaz, M. et. Al ( 2008 ) besides confirms the bi-directional causality between stock market development and economic growing in instance of Pakistan in long tally. 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
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 ten 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
There are two theoretical account specifications in my survey. One is to happen the relationship and the other 1 is to find the causality between stock market and economic growing in Saudi Arabia.
The first theoretical account examines the relationship between stock market development and economic growing straight or instead than through investing behaviour. The degree of investing is used as a control variable.
GDP = I?0 + I?1MKT CAP + I?2LD + I?3INV + Aµ
GDP = Real Per Capita GDP Growth
MKT CAP = Market Capitalization
LD =liquidity entire value of portion traded
INV = investing
Aµ = mistake term
The 2nd theoretical account is to find the causality between stock market and economic growing. This theoretical account is to prove the 2nd hypothesis of whether stock market causes the economic growing or frailty versa.
GDP = I?0 + I’1SM + Aµ
GDP = REAL PER CAPITA GDP GROWTH
SM = STOCK MARKET
Aµ = ERROR TERM
3.4 Explanation of variable
Stock market development is measured by two placeholders. There is market capitalisation and value traded ratio.
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
Liquidity ( value traded as a per centum of GDP )
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.
By and large, investing is the application of money for gaining more money. Investment besides means nest eggs or nest eggs made through delayed ingestion. Common types of investings include existent estate purchases, betterments to places and other belongings, and the purchase of stocks, common financess or other securities. In this context, investing rate is the ratio of fixed capital investing to GDP. This step is defined as existent investing divided by GDP.
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
The econometric computing machine package Eviews 6.0 is used for the appraisal. To through empirical observation analyze the relationships and dynamic interactions among the stock market and GDP, the theoretical account has been estimated to utilizing is the bounds proving or autoregressive distributed slowdown ( ARDL ) . Autoregressive distributed lag theoretical account ( ARDL ) popularize by Pesaran et Al. ( 2001 ) . The ARDL has legion advantages.
The process of bounds test is adopted for the undermentioned four grounds:
First, the bounds test process is simple.
Second, the bounds proving process does non necessitate the pre-testing of the variables included in the theoretical account for unit roots.
Third, the trial is comparatively more efficient in little or finite sample informations sizes as is the instance in this survey.
The ARDL attack is able to analyze the presence of short tally every bit good as long tally relationship between the independent variables and the dependant variable.
Before proceed with the ARDL bounds trial, should prove for the stationarity position of all variables to find their order of integrating by unit root trial. Determine the stationarity of the series in order to avoid specious arrested development. Stationarity could be achieved by appropriate differencing.
In order to prove for causality between stock market and economic growing we utilized the Granger causality trial. 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.
There are many surveies that have examined the relationship between growing and stock markets utilizing either transverse state or clip series. Traditional growing theories believed that there is no correlativity between economic growing and stock market development.
Some recent surveies stated that stock market play an of import function in economic activities. Rousseau and Wachtel ( 2000, ) Campbell ( 2001 ) and Cooray ( 2010 ) are besides reported positive effects stocks on economic growing. Other group argues that stock market make non assist in economic development such Shahnoushi, Ebadi, Danehsvar & A ; Shokri ( 2008 ) and Fase & A ; Abma ( 2003 ) .
While this survey attempts to happen the causality and the relationship between economic growing and stock market development in Saudi Arabia from clip period 1999 to 2009 by utilizing ARDL method Granger causality trial.