The Saudi Arabian stock market stands as a pivotal component of the Kingdom’s burgeoning economy, intertwining closely with key macroeconomic variables such as national income, oil prices, and real interest rates. Understanding the complex interplay of these factors is essential not only for investors but also for policymakers aiming to stabilize and optimize market performance. Recent empirical research employing advanced econometric techniques has brought fresh insights into how fluctuations in income, oil rents, and interest rates distinctly influence the stock market dynamics of Saudi Arabia both in the short and long term.
At the heart of this analytical inquiry lies the Nonlinear Autoregressive Distributed Lag (NARDL) methodology, which allows for an exquisite dissection of asymmetric effects within the data. Unlike traditional linear models, NARDL acknowledges that positive and negative shifts in explanatory variables might not mirror identical repercussions on stock market metrics. This methodological approach facilitates a granular understanding of the Saudi stock market, capturing nuanced investor behaviors and market reactions to incremental and decremental changes in economic fundamentals.
One of the most robust findings emerging from this investigation concerns the role of income in shaping stock market performance. The analysis demonstrates a positive and statistically significant impact of increased income on the Saudi stock market across both long-run and short-run frameworks. This aligns well with the theoretical premise that rising income levels boost investor confidence and liquidity, fostering enhanced market activity. Notably, this correlation is corroborated by earlier works spearheaded by scholars such as Omar et al. (2022) and Kaustia et al. (2023), reinforcing the global consistency in income’s stimulative effects on equity markets.
However, a paradoxical observation surfaces when examining the second moment effects of income increases in the short run, where a negative impact materializes. This seemingly counterintuitive outcome can be attributed to the rising uncertainty endemic to the Saudi stock market environment, coupled with heightened price-to-earnings ratios that coax investors toward alternative, higher-yielding ventures. Such volatility underlines the market’s sensitivity to fluctuations in investor sentiment and the imperative for fiscal authorities to mitigate income-related distortions through prudent policy measures.
The interplay between oil rents and stock market performance exhibits a fascinating asymmetry. By decomposing oil rent fluctuations into positive and negative components, the study reveals that only the negative changes—oil price decreases—exert a significant and favorable influence on the Saudi Arabian stock market over the long term. This phenomenon underscores the beneficial effects of reduced raw material costs, which translate directly into enhanced corporate profitability and stock valuations. These findings resonate with research by Rahmanto et al. (2016) and Alamgir and Amin (2021), who highlighted the counterintuitive boosts firms experience when oil prices retreat.
Short-run dynamics further reveal pronounced asymmetries in oil’s effect on market returns. While increases in oil prices impose a negative toll on market performance—likely due to inflated input costs biting into firm margins—the converse holds true for initial drops in oil prices, which stimulate market gains. Varying perspectives within the academic community exist regarding these impacts. Some studies, such as those by Kelikume and Muritala (2019), converge with the current findings, whereas others present contradictory views, emphasizing the importance of methodological rigor, such as variable decomposition, to disentangle these complex relationships.
The inquiry into real interest rates, similarly subjected to positive and negative component analysis, reveals nuanced insights into their role within Saudi Arabia’s equity markets. The negligible significance of the negative attribute coefficient implies an asymmetrical effect, further complicated by the pronounced, negative significance of the positive attribute coefficient. This indicates that interest rate hikes tend to depress stock market valuations—a dynamic documented in previous studies by Alam and Uddin (2009) and John (2019). The influence of interest rates, therefore, is not merely linear but hinges on the directional movement, a critical consideration for monetary policy calibration.
Interestingly, despite the intuitive expectation that interest rates should interrelate strongly with both income and oil price movements, the Granger causality test elucidates a unidirectional causality from interest rates to these variables without reciprocal effects. This directional causation diverges from certain findings in the literature, such as Sadouni et al. (2022), enriching the discourse on the bidirectional dynamics governing macroeconomic variables and financial markets within oil-dependent economies.
Another remarkable outcome of this investigation is the absence of any detected causal relationship between oil prices and stock market performance within Saudi Arabia. This finding challenges prevalent assumptions regarding the omnipresence of oil price shocks transmitted directly to stock market volatility. The lack of causality indicates either a decoupling effect facilitated perhaps by diversified market structures or the buffering impact of policy mechanisms attenuating the direct pass-through from oil price swings to equity valuations.
Expanding upon the implications for authorities, the study stresses the critical role of regulatory and fiscal initiatives to harness these empirical findings. Given that income growth positively impacts stock market performance, governments must strive to ensure stable and equitable income growth through fiscal prudence. Concurrently, the negative second moment effect of income volatility in the short run necessitates mechanisms to dampen fiscal distortions that could exacerbate market instability.
Moreover, the asymmetrical oil price impact reveals a compelling case for diversifying the energy resources underpinning the corporate sector. Encouraging a transition toward sustainable and renewable energy sources could insulate market participants from the deleterious cost pressures associated with oil price spikes. This strategic pivot would not only promote long-term corporate resilience but could also stabilize equity markets by reducing dependence on volatile oil revenues.
Policy recommendations extend to the realm of monetary policy given the significant negative impact of rising real interest rates on stock market performance. Implementation of subsidy programs could serve as counterweights, alleviating the financial burdens on firms striving to maintain operational throughput amidst restrictive credit conditions. Furthermore, tax relief measures on raw materials and production inputs could strategically offset cost escalations triggered by higher interest rates, sustaining investor confidence and encouraging continued corporate expansion.
From a methodological perspective, this research contributes to the literature by employing a comprehensive aggregate market index encompassing the entirety of Saudi Arabia’s stock market sectors. This holistic approach provides a macroscopic vantage point, yet acknowledges the potential fertile ground for subsequent disaggregated sectoral analysis. Future investigations dissecting sector-specific responses could refine understanding and tailor policy prescriptions even more precisely.
The dynamic evolution of Saudi Arabia’s stock market, marked by an expanding roster of companies and a diversification of industrial sectors, adds layers of complexity to the economic variables’ interactions. Policymakers and market regulators must grapple with these intricacies to maintain market stability and investor trust. Analytical frameworks that incorporate asymmetry and causality testing are indispensable tools in this endeavor, elucidating subtle interdependencies that classic models may overlook.
Investor sentiment, heavily swayed by macroeconomic signals, is inherently affected by the unpredictability encapsulated in higher moments of economic indicators. The negative influence of income volatility in the short run encapsulates this phenomenon vividly. Markets that can weather such oscillations with minimal perturbation are better positioned to attract both domestic and international investment, fueling broader economic growth and development.
Ultimately, the findings presented delineate a multifaceted portrait of the Saudi Arabian stock market’s responsiveness to income, oil price variations, and interest rate movements. The asymmetrical effects uncovered challenge oversimplified narratives and highlight the imperative for nuanced policy frameworks capable of adapting to the nonlinear realities driving financial market behavior in an oil-exporting economy. The path forward lies in leveraging these analytical insights to craft informed interventions that promote sustainable market growth and resilience.
In sum, this comprehensive examination enriches the understanding of how key macroeconomic factors dynamically influence the performance of Saudi Arabia’s stock market. By unraveling the layers of asymmetry and causality embedded within the data, it lays a robust foundation upon which future research and policy action can build. This progression is vital for harnessing the full potential of the Kingdom’s capital markets amidst a rapidly evolving global economic landscape.
Subject of Research: The influence of income, oil prices, and real interest rates on the performance of the Saudi Arabian stock market.
Article Title: The influence of changes in income, oil, and the interest rate on the Saudi Arabian stock market.
Article References:
Alabdulwahab, S. The influence of changes in income, oil, and the interest rate on the Saudi Arabian stock market.
Humanit Soc Sci Commun 12, 888 (2025). https://doi.org/10.1057/s41599-025-05277-x
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