The Informational Efficiency of the Saudi Stock Market

  • Abdullah Abdulaziz Alesmaiel

Student thesis: Doctoral ThesisDoctor of Philosophy


Over the last 20 years, Saudi Arabia has implemented various capital market reforms and opened the stock market to international investors. These reforms have resulted in the inclusion of the stock exchange into leading global indices, such as the MSCI, FTSE Russell and S&P Dow Jones emerging market indices. Inclusion in these indices is expected to lead to an influx of foreign investment into the market. Thus, it is important and timely to examine the efficiency of the Saudi stock market. To that end, this thesis provides empirical evidence on the weak form efficiency of the Saudi stock market.

The analysis begins by examining the predictive ability and profitability of filter and moving average rules using firm-level data over the period 1st January 2008 to 31st December 2017. Results averaged over the 100 sample companies show that the trading rules have predictive ability; the active rules for a majority of the sample companies outperformed the corresponding passive strategy. Furthermore, the trading rules were economically significant as they were profitable even after the consideration of transaction costs. Importantly, small-sized filters and short variants of the moving average rule were more profitable than large-sized filters and long variants of the moving average rule, suggesting that judicious selection of filter size and the length of the moving average can improve the performance of these rules. The analysis also showed that the most profitable component of the trading rules related to short-selling as these trades resulted in higher profits than long positions. An out-of-sample test also showed that trading rule profits were stable over time. Overall, the analysis documents significant trading rule profitability in the Saudi stock market which can be attributed to stock market inefficiencies. These findings have useful implications for investors; the employment of small-sized filter rules and short variants of moving average rules can provide investors with highly profitable opportunities, even in a costly trading environment. These findings also have important implications for regulators; the recent reforms that were implemented to improve the efficiency of the Saudi stock market have been sub-optimal and, thus, further regulatory reform is required.

The second part of the analysis builds upon these results and investigates whether trading rules are more profitable for firms with certain characteristics. The resulting findings showed that turnover and the market-to-book ratio were positively related to trading rule profits, and that return on assets, unexpected earnings and market capitalisation were negatively associated with trading rule profits. These results suggest that firms that are high in liquidity and growth, and low in profitability, earnings uncertainty and size have a higher potential to generate trading rule profits. Furthermore, firms in the financial and industrial sectors tended to earn higher trading rule profits than firms included in other sectors, implying that these sectors are the most informationally inefficient. The implication of these results for investors is that careful selection of firms is important for maximising profits from the trading strategies examined.

The final part of the analysis examines the weak form efficiency of the Saudi stock market following its opening to international investors. The results from both parametric and nonparametric variance ratio tests revealed that the random walk hypothesis was not rejected after opening the market to foreign investors. This evidence implies that the steps taken by policy-makers to liberalise the Saudi stock market appeared to have a positive impact on the level of market efficiency.
Date of Award2021
Original languageEnglish
SponsorsKing Faisal University
SupervisorSuzanne Fifield (Supervisor) & Justin Hof (Supervisor)

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