Is there a “Flight to liquidity” phenomenon in the Saudi stock market?

Abstract

The study examines how market illiquidity shocks affect stock prices and explores the "flight to liquidity" phenomenon in the largest stock market in the Middle East, specifically the Saudi stock market. It analyzes the relationship between these shocks and stock prices to understand the impact on both small and large firms. Utilizing a comprehensive database that contains daily data of all stocks listed on the Saudi stock market for over 20 years, the research evaluates the illiquidity of each stock and the entire market on a weekly basis. Market illiquidity shocks are determined using an autoregressive model, and the effect of these shocks on Saudi stock prices is assessed through illiquidity betas in linear regressions for both large and small firms. Initial findings show that illiquidity shocks were significant during periods of oil price declines and global financial crises. The results confirm that stock prices fall in response to market illiquidity shocks, with the impact varying by firm size; larger firms' stocks are less affected, indicating a flight to liquidity towards larger firms during market downturns. This pattern aligns with observations in the US and some emerging markets.