Is the Saudi Stock Market Efficient? A case of weak-form efficiency

Abstract

The purpose of the paper is to test the weak-form market efficiency in Saudi Arabia's stock market, Tadawul which is expected to follow a random walk.  All share index and sectoral indices for daily closing prices in Tadawul between October 15, 2006 and November 15, 2012 are collected.  Unit root Dickey-Fuller test, Pearson Correlation test, Durbin-Watson test and Wald-Wolfowitz runs-test are used as basic stochastic tests for a non-stationarity of the daily prices for all the listed companies in the market, both overall and sector-wise.    The four tests confirmed the weak-form market efficiency in the Saudi stock market for All share prices and 11 individual sectors.  The findings are necessary for all investors in Saudi Arabia and the member states of the Gulf Cooperation Council (GCC). Listed firms could also benefit from the findings by seeing the true picture of their stock price.  The finding is used as a basis for testing the market efficiency in the semi-strong form, which has not yet been tested by any researcher. Accordingly, investors in the Saudi market are not expected to generate abnormal returns simply by depending on past information and technical analysis. This paper will add value to the literature of market efficiency in the emerging market and the GCC since it covers all the listed companies, tests sector-wise, and covers an extended period of time.  To confirm the weak-form efficiency in Saudi, the study uses four tests and covers a long period of time during and after the financial crisis.

Keywords: Weak-form market efficiency, random walk hypothesis, unit root test, auto correlation, run test, Kingdom of Saudi Arabia.