An Investigation of the Relationshipbetween Capital Market Developmentand Economic Growth :the Case of Saudi Arabia
This thesis investigates the long-term and short-term relationships between capital market
development and economic growth in the Kingdom of Saudi Arabia (KSA) for the period
from 1970 to 2010. It employs a wide range of vector autoregression (VAR) and Vector Error
Correction (VECM) models, Unit roots tests, optimal lag tests, Johansen-Juselius
cointegration tests and Granger causality testes to evaluate the importance and impact of
capital market development on economic growth. Using real GDP growth rate (RGDPR) and real non-oil GDP growth rate (RNOIL) as
proxies for economic growth and LM1, LM2 and bank credit to private sector (LBCP) as
proxies for the capital market development. The vector-autoregression models (VAR)
indicates significant long-term causal relationship among all the variables in the system.
Granger causality tests show a bidirectional causal relationship between the economic growth
variable RGDPR and the capital market when proxied by the bank credit to private sector
(LBCP). However, Error-correction models results show no relationships in the short-run.
The thesis implications are as follows. Firstly, investment in real economic activities leads to
economic growth. Secondly, the stock market might hinder economic growth due to its
volatile and international risk sharing nature, low free-floating share ratio, number of listed
companies, the domination of Saudi Individual Stock Trades (SIST) characteristics and the
small size of the least active and limited bond and ETF markets. Thirdly, policymakers
should seek to minimise stock market volatility and fluctuations, increase all the free-floating
share ratio, number of listed companies, size and offering in the bond and ETF markets and
shift investment domination toward corporate investors by considering its effect on economic
growth when formulating economic policies. Fourthly, the banking sector might hinder
economic growth due to its lack of small and medium enterprises lending and shareholder
concentration issues. Finally, policymakers should seek to encourage banks toward more
involvement in small and medium enterprises SMEs’ lending, which will strengthen the
private sector role.