The Saudi Arabian stock market: efficient market hypothesis and investors behavior

Abstract

The objective of the study is to determine the informational efficiency of the Saudi Arabian stock market. I argue that the Saudi market is weakly informationally inefficient as is the situation in a number of other developing countries stock exchanges. A strong motivation to study the market is lack of rigorous research about the stock market specifically and the financial system in general. I use a number of empirical tests, namely the autocorrelation test, the runs test, the filter technique and the more modem approach, the cointegration test, to examine the efficiency of the SA stock market. In addition, the study includes a survey of the market in order to have a better idea about market agents' behavior as well as the information flow mechanism in SA. Results of these tests, along with the survey results, revealed that the SA stock market is not informationally efficient. Finally, based on the conclusions, a number of recommendations are suggested to minimize the informational inefficiency snags. Among these recommendations are: the need of the market for stock market law, a more reliable financial reporting, a presence of dynamic community of analysts and an independent financial press as well as establishing a unified watchdog body to monitor the market mechanisms.