Does Stock Market Performance Affect Economic Growth? Empirical Evidence from Saudi Arabia

Abstract

This research paper investigates the impact of stock prices on real economic activity in the Saudi Arabian economy. We utilize various econometric techniques – Johansen and Juselius’s (1990) cointegration tests and Granger’s (1969) causality test – to assess such a relationship, based on quarterly observations spanning the period from the first quarter of 2010 to the fourth quarter of 2018. Our empirical evidence indicates the presence of a significant cointegrating relationship between the two variables being examined; in other words, stock prices have a significant impact on real economic growth. Specifically, the estimated long-run relationship reveals that a 1 percent increase in stock prices would boost economic growth by 0.32 percent. In addition, the error correction model suggests that when the economy deviates from its steady state condition, it needs about a year and a half to return to its equilibrium condition. Lastly, this paper applies the most common Granger causality test, which confirms the essential role of stock prices in predicting changes in economic growth.