Examining macroeconomic determinants of the stock market performance: Evidence from Saudi Arabia

Abstract

This research examines Saudi Arabia's stock market performance from 1991 to 2021 while exploring the long-term and immediate effects of economic factors. The study employs Johansen cointegration tests alongside the Vector Error Correction Model (VECM) to analyse the influence of Gross Domestic Product (GDP), inflation, Foreign Direct Investment (FDI), trade balance and government expenditure on stock market performance. The research shows that macroeconomic variables affect market capitalisation results since GDP growth and trade openness lead to positive stock market performance; however, FDI and inflation create inconsistent effects. Results indicate the stock market maintains a long-term equilibrium between variables, leading to long-term correction of market deviations. The present study extends the discussion in the literature by offering a comprehensive and empirical analysis of the Saudi Equity Market as related to the economic diversification process, with a focus on the Saudi Arabia Vision 2030. This research calls for a solid and pro-active fiscal framework to stem inflation, attract good quality foreign capital and enhance the financial institutions. They are very useful in the formulation of strategic development plans that would foster long-term sustainable growth and increase investor confidence. The findings of this study are useful for policymakers, investors, and other analytical experts interested in the relationship between economic determinants and capital market returns, specifically within the context of Saudi Arabia, a young economy in the group of commodity-exporting countries. This study contributes original empirical evidence on the long-and short-run effects of macroeconomic indicators on stock market performance in Saudi Arabia. By applying the VECM approach across a 31-year period, it offers valuable insights for policymakers and investors in managing financial markets during economic diversification under Vision 2030.