Saudi Stock Market - Research Paper Example

Literature Review Saudi Stock Market Insert The Saudi Stock Market Introduction The research highlights the Saudi Stock market main phases, the index performance over the years, its legal authority, trading volume and its market influencers The Saudi Arabian economy is flourishing and growing rapidly. Often share price movements are reflections of what is happening in the economy. Therefore, the Saudi stock market performance and efficiency is an effective indicator of the Saudi economy status. However, the Saudi Stock Market in the last years has witnessed a massive fluctuation in its performance, which led to a huge fear in the market due to different reasons. Literature Review For most investors, the risk of any investment is the returns. As such, the volatility of stock market returns is a fundamental task for financial markets. In most cases, this volatility is caused by unavoidable risks. It is therefore not surprising that any investor would want to anticipate the amount of unavoidable risks they are exposed to. As such, the Saudi Arabian stock market has been of great interest to economic researchers. Factors that affect volatility will also be referred to as market influencers in this paper. Studying market influencers will promote the market as a viable opportunity to external investors and globalize the securities for better market performance. This means market stability (Ibp Usa & USA International Business Publications, 2005). Despite being exposed to major turbulent and market-moving events, the Saudi Arabian stock market has shown tremendous improvements. A reflection of this can be seen in the share price movements and the flourishing economy. The peak of this performance was in February 2006, but this was affected by the severe global and economic downturn in the late 2008. Another factor that fuelled this backdrop was the unprecedented unrest in the Middle East during almost the same period. The market has however shown improvements in the past several years to become one of the best in the region. Research methodology In an attempt to study the market stability and progression of the Saudi Arabian stock market, several researches were done. While some research has focused on the quantitative and qualitative data, others have focused on external influences and comparisons made against stock markets in a bid to explain the performance of the Saudi Arabian stock market. Stock market indexes of specific companies in that country are used for purposes of this study. Consequential studies have unearthed that the Saudi Arabian stock market has distinct and clear cut differences with other markets. Firstly, the shares are traded through commercial banks. Secondly is the absence of bourse makers and thirdly is the liquid characteristic of the market (Mohamed, 2010). Both econometric quantitative and qualitative methodologies were sued to test null hypotheses. Even though some of the traditional methods were considered, more intensive enabling models were used for purposes of increasing effectiveness of information. In an extensive study of the volatility and market stability of the Saudi Arabian stock market, symmetric and asymmetric models were applied. In the symmetric models, the magnitude of the returns is dependent on the condition of the country only. The asymmetric models state that the spread of outcomes is dependent on external factors such as external demand. Also, the qualitative The persistent evidence was that an increase in the spread of market influencers is directly proportional to a similar increase in returns. The variables in this case are consumer demands especially in the external sector, reasonable volatility in economic activities and the all time high prices of oil. Reasonable levels of performance in the global market are one of the factors that affect the Saudi stock exchange market. This stock market flourished due to the indirect effect of other markets. Another determinant of market stability is the oils price, which has remained high, and thus the returns are high (Mohamed, 2010). Hypothesis 1. The capital markets authority has had a tremendous impact on the Saudi stock market, but standardization of ding its power would promote sustainable growth and expansion in the market since all stakeholders need a fair play in the economy to attain a worthwhile market share. 2. The historical performance, peak, the downfall, as well the performance of the stock index over the recent years were highly impacted by the policies imposed by the capital markets authority and their revision would steer stability of the Saudi stock market. With the application of the above research methodologies, several limitations do appear. First, the tests may seem more of ad hoc, data has to be arranged along a known variable. A good example is the application of symmetric model. In some cases, asset returns turn out to be unexpectedly large interfering with the null hypothesis. Additionally, the market is more of an oil producing economy, it would be difficult to compare Saudi Arabia’s stock market in the Dow Jones Industrial Average. Oil is a resource not so vast in non- oil producing countries. Theoretical framework Apparently, one of the market influencers that affect market stability is the stock market being controlled with the Capital Market Authorities (CMA). The result of this is bad managerial techniques. Evidently, there is a gap on literature available on the same despite the issue being pertinent in the Saudi Arabian stock market. Some researchers have thus applied the use of multiple qualitative analysis and correlation analysis to obtain an understanding of the effects of CMA on Saudi Arabia’s stock market. From the findings, it was suggested that curtailing the powers of CMA might curb this problem (Mohamed, 2010). However, the findings could not be applied to all the companies as some companies do have special practices and regulations. Whether it is by choice or coercion, it would be impossible to utilize these findings for all companies due to their uniqueness. A plausible interpretation is attributed to theories of institutions. These focus mostly on the fact that all firms acquire collective meaning from legitimization. It has however been shown that some companies are coerced by the Saudi Arabian Capital Markets Authority on the adaptation of some policies. As such, inconclusive remarks were made on the relationship between firm performance and audit committee characteristics. However, the same evidence can be used to conclude that the curtailing of some of CMA’s powers can help in improving market performance. Apart from regulations from the CMA, quantitative research unearthed the fact that political influence plays a major role in influencing the market. For any investor, political stability is a major factor when it comes to market volatility. Being one of the gulf countries and surrounded with countries facing political unrests affects its stock market. Politics has a direct effect in oil, which affects stability of the stock market. Findings It was found that interest rates have a negative relationship with stock price. There was one limitation for this method was that it does not consider the strength of an emerging economy like that of Saudi Arabia. The results can however be used to make inferences in the same countries especially considering the varying prices of oil which is one of the biggest exports of the country. Several findings are quite evident in the above researches. First, volatility of the finance market is an important consideration for every investor. Secondly, CMA needs to be keen as the policies they make would affect the decision of any investor. Third, the efficiency with which a market operates is a big determinant to the stock prices. Based on the above premises, the TAWADUL, CMA and SAMA can use the provided recommendations to keep the Saudi Arabian stock market among the best in the gulf countries and in the world(Oxford Business Group, 2008). Discussion This knowledge can help in making a few assertions about the Saudi Arabian stock market. Interestingly, this market is not providing the returns to its maximum and can perform better. The reigning factors to this end are majorly based on the fact that only three entities control the Saudi Arabian market and no outside influence is allowed at any one point. In as much as this is meant to protect the market, it also contributes to slow performance and thus lowers the potential investments are seen. Using such theoretical evidences, increasing transparency especially in languages and market volatility should be made a priority. Some authors suggest the inclusion of outside management bodies as a way of mitigating the opportunistic behaviors of the three controlling entities. The CMA, TAWADUL and SAMA are accused of having interests which are risky and non-prudent with investors (Oxford Business Group, 2008). Research Gaps Research based on investigating the relationship between the efficiency of the market and the prices of stock did not consider the differences between developed economies and other economies. Despite the use of a very effective factor such as the randomness of stock returns, it would be paramount to also consider the economic factors. In a developing country like Saudi Arabia, interest rate can determine the market efficiencies due to reduction of delays in the trading chain. The use of symmetric and asymmetric models can also yield different results from more current methods. This is because of the application of preliminary evidence and the lack of uniformity in detecting fluctuations from the random walk, which is occasionally the nature of the Saudi Arabian stock market. The same models study majorly the volatility effects being ignorant of the leverage effects. Leverage effects are quite significant in this case especially in the asymmetric models where they appear in minimal levels. Here, they can imply that in some cases, there are negative shocks that would greatly affect the Saudi Arabian stock market even if it is at one percent confidence levels. This may also imply something on the positive risk premium theory in order to clearly indicate the effects of shocks eminent on the Saudi Arabian stock market (Nidal, 2002). . Studies done on the effect of management of CMA on the performance of the stock market did not consider the use of data base which is the main contributor in this case. Company’s characteristic can be vast and different depending on the goods being dealt with. Inferences made in this case cannot be applied to all companies and further studies need to be conducted to this effect. Only two theories of corporate governance can be applied in this case. Despite the strong evidence provided in this case, other theories exist to this effect. Some of the theories could be conflicting since they are not inline with the finding to this particular stock market. Conclusions The volatility of the Saudi stock is highly attributed to overly compelling regulations as required by the CMA, however, it is worthwhile to consider that Saudi is a developing economy and experiences fluctuations since markets are yet to stabilize. Thus, the stock market lacks uniformity and performs relatively well when regulations are implemented in attempt to prevent adverse market inefficiencies. In addition, Saudi stock market compares indifferently to other major economies mainly because the regulatory authorities such as CMA are not truly efficient are driven by personal agendas of the officials, thus investor confidence is negatively affected and the trading chain become prone to non-uniform patterns. The literature available on this broad topic, Saudi stock market depicts the perception of several profound authors who highlight the poor management technique since the trade does not entirely thrive on a free market and key issues in trade such as interest rates are set by the authorities and the role of demand and supply balance is overlooked. Thus, the stock market suffers immense managerial crisis. Reference list Ibp Usa & USA International Business Publications (2005).Saudi Arabia Central Bank & Financial Policy Handbook. Intl Business Publications. Mohammad, A. S (2011).Three Essays on the Market Microstructure of the Saudi Stock Market. LAP Lambert Academic Publishing. Mohamed, A. R (2010).The Saudi Arabian Economy: Policies, Achievements, and Challenges. Springer publishing. Nidal, R. S (2002). International Financial Systems and Stock Volatility: Issues and Remedies. Emerald Group Publishing. Oxford Business Group (2008).The Report: Saudi Arabia 2008.Oxford Business Group. 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