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Get Help Now!Dependency on oil is still the main challenge facing the Saudi economy. According to Keynesian theory (Beckhart and Keynes, 1936), Government expenditure plays a significant role in stimulating the economy, which tends to move in corresponding with oil revenues (Beckhart and Keynes, 1936).In Saudi Arabia, government expenditure tends to move in corresponding with oil revenues since the petroleum sector represented almost 87% of the of budget revenues in 2018, 90% of export earnings and 42% of GDP in 2018 according to OPEC Annual Statistical Bulletin (ASB) report (Opec.org, 2020). Thus, the performance of the Saudi economy is influenced by the instability of oil prices. The year of 2015 was an example of the challenges caused by this dependency. A massive drop in oil prices (down 48 percent from 2014) resulted in a decline of 42 % in government revenues which in turn led to a decline in some macroeconomic indicators resulting in remarkable budget deficits, despite a 25% percent increase in non-oil revenues from year-earlier levels (Jadwa Investment, 2015). Henceforth, the stock markets are likely to be vulnerable to the oil price.
Figure 1.1
Source 1.1: (The U.S. Energy Information Administration, 2019)
Therefore, this paper uses Oil price as a factor driving the stock movement in Saudi Arabia as the movements in Oil price anticipated to a high impact on national income and consumption by both the public and private sector through the multiplier effect, which will, in turn, affect the stock market. (Grigoli, Herman and Swiston, 2019). On the macroeconomic level, the rapid variation in Oil prices creates unstable economic conditions and affects global financial stability, which makes it a critical macroeconomic factor (Siddiqui and Seth, 2015).
There are many other reasons for studying this relationship, particularly in Saudi Arabia. First, Saudi Arabia has considered one of the large suppliers of oil for the world energy markets. Second, oil is also a primary source of foreign exchange earnings and fiscal reve. Hencence oil price movements may influence the stock markets. Third, the nature of the Saudi Arabian market is unique as its overly sensitive to the regional political events but relatively segmented from international markets. Fourth, from an investor lens, it can be seen as an attractive place for international portfolio diversification. Fifth, monetary policymakers “SAMA”, needs to be well-positioned to counter the impact of drops in oil prices and to assess the interconnectedness between WTI oil market and Saudi Arabia Stock Market (TASI).
Therefore, the innovations of this study can be summarized as follows:
• Investigate in which degree and type of relationship between the oil prices and stock market in the largest oil-exporting economies, Saudi Arabia, to see if it is similar to the oil-importing economy where a rise in oil price considered as a risk factor affecting stock prices performance.
• The stability of this relationship
• the effects are examined using Granger Causality test in a time-varying environment from 2005-2020
• use oil price shocks in the selected period to explain whether different oil price shocks could explain changes in the Saudi Arabia Stock Market (TASI) correlation.
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