Dynamics Of The Relationship Between Bank Loans And Stock Prices In Saudi Arabia

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Saud Almutair

Keywords

Stock Market, Saudi`S Bank Loans, Error Correction Model, VAR, VECM, Saudi Arabia, Bank Loans, Stock Prices, Efficient Market, Cointegration

Abstract

The objective of this study is to find the dynamics of the relationship between bank loans and stock prices in Saudi Arabia using quarterly data for the period 1998 to 2013. The estimation methodology consists of a cointegration test, an error correction model estimation, and VAR Granger Causality. The study confirms the long-run relationship between credit card loans (CCLOAN) and Saudis stock market index (SSPI). We found a positive relationship between SSPI and bank loans, supporting the economic theory that as stock prices rise, the supply and demand for bank loans increase. This positive relationship between SSPI and bank loans is true for all types of bank loans except CCLOAN. The negative relationship between CCLOAN and SSPI can be justified because CCLOAN is affected mainly by the consumption decision, which depends on the wealth effect. The study confirms that the total bank loans (TOTALL) react positively to an increase in stock prices in Saudi Arabia, and not the other way around, supporting the efficiency hypothesis of the stock market of Saudi Arabia. Therefore, the study tends to conclude that TOTALL plays no significant role in transmitting stock market shocks to the real sector. An important implication obtained from this study is that the health of the banking sector depends crucially on stock market stability. Policies to stimulate bank loans in an attempt to boost stock market activities may be futile in Saudi Arabia.

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