The effects of global factors on the Saudi Arabia equity market by firm size: Implications for risk management based on quantile analysis and frequency domain causality

Abstract

We investigate the effect of major global factors—crude oil, gold, silver, the S&P 500 Index, the United States (US) Dollar Index and Time-varying tail dependence structure and dynamics between international prices of oil, natural gas, cocoa and sectoral stock returns in Australia: perspectives for portfolio diversification. Sep 27, 2020 Nov 22, 2020 Sent Back to Author US Treasuries—and a psychological barrier on the Saudi Arabian equity market. We consider various firm sizes to account for different potential sensitivities to the global factors over the sample period Q1:2002–Q3:2018. Further, we use the quantile approach, which covers the entire distribution of the dependent variable, unlike previous studies that focus on the conditional mean only. In addition, we conduct the frequency domain causality test to disentangle the contagion and interdependence effects. Overall, the quantile analysis results demonstrate that crude oil, the S&P 500 Index and silver positively affect the Saudi equity market, while the appreciation of the US Dollar Index negatively affects the market. The US Treasuries asymmetrically influence the Saudi market—they have a positive effect in high market conditions (75th–90th quantiles), but a negative effect in low market conditions (10th–25th quantiles). Moreover, the psychological barrier affects the Saudi market when the oil price commands or exceeds US$100 per barrel on the market across different firm sizes. Overall, our findings are sensitive to firm size and across various quantiles, which offers vital implications for investors, market participants and policymakers.