Structural changes and the relationship : between stock and oil prices in Saudi Arabia

Abstract EN

The purpose of this paper is to investigate empirically the relationship between the stock and oil prices using quarterly data from 1985Q1 to 2018Q4.

Since the economy of Saudi Arabia is an oil-based one, econometric techniques that take into consideration structural breaks are utilized.

The results indicate that the long-run relationship between stock prices, oil prices, and exchange rates could not be found until two endogenous structural breaks are taken into consideration in the analysis.

The findings show that there is a positive and statistically significant impact of oil prices and exchange rates on stock prices in both the long and short-run; however, the impact is big in size only in the long-run.

Also, the impact of the structural break, which occurred in 2003Q1, on stock prices is positive and significant in both long and short-run.

The structural break, which occurred in 2008Q1, affects stock prices negatively and significant in the long-run.

The impact of both structural breaks is large in magnitude only in the long-run.

These results may help market participants to make their decisions under a low level of uncertainty in Saudi Arabia.