Hypothesis 1: There is no significant impact of the Swap agreement between efficient markets in GCC countries and individual companies.
Hypothesis 2: There is a significant impact of the Swap agreement between efficient markets in GCC countries and individual companies.
That free flow of goods benefits both economies without serious risks is a generally accepted viewpoint, yet the free flow of capital is seen differently. A number of economists and policy makers are generally skeptical about the benefits of free flow of capital, viewing the flow of uncontrolled capital as both destabilising and risky. Others believe that the free flow of capital leads to more efficient resource allocation, leading to greater economic growth. A number of researchers have explored the issues of whether the opening of emerging markets during the financial liberalisation in developing countries to foreign investors has had any positive effect. This has been carried out by examining the state of informational efficiency before and after the official date of liberalisation. Following the 1997 Asian financial crisis, this investigation became even more relevant, because policy discussions considered the possible reversal of previous measures of liberalisation by imposing capital controls. Researchers examined the experience of emerging economies during the time that foreign investment in stock markets were allowed in order to ascertain the degree of prediction associated with capital flows. In this study, the researcher investigates the impact of capital flows upon the efficiency of the Saudi stock market by examining changes in stock market efficiency at the time of market openings to determine whether or not stock returns have become more random. Therefore, in this section a comparison of the degree of randomness with other Dubai and Kuwait stock market and the individual companies is made.
Table 8. 12: 2005-2008: Forecasting Accuracy Pre-liberalisation Statistics
Log -returns SSM DSM KSM SABIC STC NCCY AL RAJHI BANK ELECTRICITY COMPANY MAD 0.01567 0.01349 0.00561 0.02038 0.01563 0.01902 0.01808 0.02170
MSE 0.00056 0.00038 0.00007 0.00084 0.00055 0.00077 0.00076 0.00104
RMSE 0.02358 0.01955 0.00818 0.02892 0.02341 0.02771 0.02748 0.03232
MAPE 0.93526 0.90168 0.91574 0.99468 0.93016 0.92901 1.07340 0.80630
Source: Author’s own calculations
Table 8. 13: 2008-2011: Forecasting Accuracy Post-liberalisation Statistics
Log -returns SSM DSM KSM SABIC STC NCCY AL RAJHI BANK ELECTRICITY COMPANY MAD 0.01165 0.01533 0.00605 0.02061 0.01225 0.02060 0.01512 0.01113
MSE 0.00036 0.00050 0.00008 0.00094 0.00040 0.00100 0.00053 0.00032
RMSE 0.01910 0.02233 0.00881 0.03063 0.01997 0.03166 0.02310 0.01800
MAPE 0.93032 0.94931 0.94943 0.93925 0.88170 0.91262 0.88567 0.73121
Source: Author’s own calculations
Table 8.12 and 8.13 report the MAD, MSE, RMSE and MAPE test form ARIMA model. The first sub sample is for the sub-periods of the pre-Swap agreement between 01-01-2005 to 31-12- 2007. The second sub-sample is the post-swap agreement between 01-01-2008-31-12-2010. The state of informational efficiency before and after the official date of liberalisation is examined.
Table 8.12 shows that the returns in the all countries index and the individual companies were predictable either in the MSE or RMSE tests or both during the pre-swap agreement stage between 2005-2008. There are changes in the degree of efficiency before and after the swap agreement. The results show Saudi to be the most efficient stock market in this sample period when ranking the GCC markets in terms of weak-form stock market efficiency; DSM, and KSM are ranked 2 and 3 respectively. Table 8.13 illustrates changes in the predictability of returns post market openings, which reveals a statistically significant reduction in the predictability of returns for SSM, DSM and KSM and most of the companies within the Saudi stock market
(STC, NCCY, Al Rajhi Bank and Electricity Company) show an increase in predictability, demonstrating the negative impact of the Swap agreement. For instance, SSM on post- liberalisation has a lower MAD, MSE, RMSE and MAPE (0.01165, 0.00036, 0.01910, and 0.93032, respectively) than during the pre-liberalisation period which is MAD, MSE, RMSE and MAPE (0.01567, 0.00056, 0.02358, and 0.93526, respectively); SABIC is the only one showing an effect that is positive. The opening of SSM to foreign investors has not had any positive effect on the efficient market, which is confirmed for individual companies, such as STC, NCCY, Al-Rajhi bank and Electricity Company; only SABIC demonstrates a positive effect. This result confirms the alternative hypothesis that there is no significant impact of liberalisation. Stock market information efficiency literature suggests that removing capital controls should result in increased liquidity from foreign participation, and especially in markets characterised by thin trading and low liquidity. Disclosure and the quality of information should be improved by foreign participation which, in turn, should lead to an increase in market efficiency. The results in Table 8.12 and Table 8.13 contradicts this view, showing the opposite effect for Saudi, which can be interpreted as showing the Saudi stock market to be relatively more efficient during the period of less integration into global markets. There are several possible reasons for this, suggesting that foreigners buy and sell less than in the developed market. There is also evidence of optimality in foreign shareholding that suggests that the efficiency benefits disappear after a certain threshold level is exceeded by foreign ownership ( Lim et al., 2016). Foreign investors within Saudi stock market account for about one per cent of the total market. Partial lifting of restrictions on foreign investment in the Saudi stock market, could be another reason, since foreign investment trade is only allowed through the Swap agreement in that time. There are also possible fears that a sudden reversal of foreign capital flow into the country, followed by irrational stock sell-offs could amplify fluctuations in stock price, and particularly since the Saudi stock at that time had just recovered from the internal crisis of 2006.
A number of academics comment that that the liberalisation of financial market does not necessarily lead to a more efficient stock market (J. Wang, 2013; Graham et al., 2015; Al- Khouri and Abdallah, 2012)
The question whether a liberalisation policy alters the volatility structure of the Qatar exchange market was examined by (Al-Khouri and Abdallah, 2012) Al-Khouri and Abdallah (2012), who found no significant change in the volatility of market returns. A negative link
between foreign ownership and the future volatility of Indonesian stocks was commented upon by (J. Wang, 2013). Such reports suggest some evidence of an inverse relationship between the integration of global stock markets and stock market efficiency. This contradicts evidence reported by (Han Kim and Singal, 2000; Ataullah et al., 2004; Chordia et al., 2008; Cajueiro et al., 2009; Bae et al., 2012; Hooy and Lim, 2013; Ahmed, 2016; Vo, 2017). De Roca, Luna and Tan (2017). However, this strand of studies explains that positive impacts of market liberalization are only visible under a developed financial system and improved institutions. Smimou and Karabegovic, (2010) examined the impact of economic freedom upon stock market returns in the MENA region, using data for eleven countries from 2000 to 2007. Their results show a statistically positive impact on the market returns of the sample within MENA countries following changes in the overall level of economic freedom. These findings suggest that other factors affect the level of return predictability, including political events, external shock and macroeconomic effects. Foreign investors are likely to gain from the predictability of returns if markets are predictable and foreign investors are sophisticated. Market inefficiencies will be taken advantage of by foreign investors, leading to a reduction in market inefficiencies, with prices reacting more rapidly as new information become available. A more efficient allocation of capital should reflect less predictability in stock prices. Another explanation for the observed. More frequent trading may also decrease predictability, leading to a reduction in the non-synchronicity bias; this is discounted by (Kim and Singal, 2000)
The conclusion is that the opening of SSM to foreign investors has not had any positive effect upon the efficient market, which applies to most of the individual companies within the Saudi stock market, therefore confirming the alternative hypothesis that there is no significant impact of liberalisation. This finding also suggests a low level of return predictability related to other potentials, such as political events, external shocks and macroeconomic effects.