Inflation and Equity Trading in Saudi Arabia

Abstract

This study evaluates the performance of the Saudi Arabian stock market using key indicators, including trading volumes, stock prices, and market capitalization. Recent concerns from Saudi economists highlight a persistent negative trend in the market. The research investigates several hypotheses to explain the limited size and number of mutual share funds in Saudi Arabia. However, the analysis reveals that none of these hypotheses adequately accounts for the market's slow development during the study period. Two hypotheses were dismissed due to the market’s partial integration with major external markets and the restricted access to hedging services via futures contracts for most fund managers. Despite these factors, significant yield differentials and high transaction costs have hindered full market integration. These insights are particularly relevant as Saudi Arabia continues its efforts to join the World Trade Organization (WTO) and as fund managers develop Islamic and Middle Eastern investment portfolios. The study underscores the importance of money supply management as a tool for regulating market performance. It suggests that constraining the growth of the monetary base could help offset the negative impact of rapid money supply expansion on stock market stability. The findings also recommend that Saudi regulators take steps to reduce market volatility, which tends to rise with increased money supply, especially during periods such as the Hajj. Investors can use this information to anticipate fluctuations in market volatility associated with ritual-related spending across the Islamic calendar.