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

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  • 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
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    File URL: http://www.reading.ac.uk/web/FILES/economics/emdp202027.pdf
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    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

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