The price discovery process and volatility linkages in a resource-based emerging market: evidence from the Saudi Stock Market

With the opening up of the Saudi Stock Market to foreign participation, international interest in this important oil dominated economy has intensified. This paper examines the interrelationships between the 12 sector indices in the Saudi Arabian Equity market - the largest equity market in the region in terms of market capitalisation. The vector error correction model shows that the petrochemical sector had the largest short run speed of adjustment followed by agriculture and building. This is consistent with the observation that many international investors use the Saudi petrochemical sector to achieve oil factor exposure. The study also investigates the cross sectional structure of innovations or volatility across the sectors using a low order GARCH representation. The contemporaneous correlation in standardised innovations across the sectors is relatively high, while lagged innovations in the banking and industrial sectors showed the largest impact on future volatility of the other sectors.