JOHANSEN CO-INTEGRATION ANALYSIS

Following OLS regression analyses, the next step in testing the relation between the six independent variables employed above, namely, Market Capitalization Ratio (LNMCR), Number of Shares Traded (LNNST), Value of Shares Traded (LNVSTR), General Index (LNGI), Number of Transaction (LNNT) and Government Spending (GS) and the dependent variables of GDP, Non-Oil GDP, Non-oil Sector GDP, Gross Fixed Capital and Non-oil Gross Fixed Capital. Co-integration between these independent and dependent variables was tested by the Johansen co-integration test to establish the long-term relationship.

In the Johansen co-integration test, the existence of a co-integration vector is signified by a trace test value exceeding the critical value of 5% level of significance. Such a result means that the co-integration tests are statistically significant at the level of 5%

for determining a long-run relationship between the independent and dependent variables. On the other hand, if the trace-test results appear to be below the critical value, this points to a long-run equilibrium relationship between the independent and dependent variables.

6.4.1. Model 1: GDP

Following the same order of dependent variables in analysing, the first step is the tests for GDP, as depicted in Table 6.9. The co-integration analysis gives rather interesting results. First of all, the independent variable, the Number of Shares Traded (LNNST), which was consistently statistically significant in the OLS regression analyses above, does not appear to have a long-run relationship with the GDP.

Table 6.9: Johansen Co-integration test Hypothesized

No. Of CE(s)

Eigenvalue Trace Statistics

Critical Value 5%

LNMCR None 0.218823 5.998592 15.49471

At most 1 0.218823 0.071723 3.841466

LNNST None 0.174153 4.868224 15.49471

At most 1 0.011434 0.276000 3.841466

LNVSTR None 0.231882 6.880785 15.49471

At most 1 0.022628 0.549308 3.841466

LNGI None 0.257186 7.210497 15.49471

At most 1 0.003123 0.075075 3.841466

LNNT None 0.380697 11.90706 15.49471

At most 1 0.016823 0.407196 3.841466

LNGS None 0.469379 15.77995 15.49471

At most 1 0.002952 0.070959 3.841466

This lack of a long-run relationship is also evident for the other significant independent variables of Market Capitalization (LNMCR) and General Index (LNGI) (Table 6.9). The relationship between the GDP of the Saudi economy and these independent variables seem to be insignificant in the long-run, rather than following similar trends.

As a result, it can be suggested that while changes in the GDP can be explained by the changes in Market Capitalization (LNMCR), General Index (LNGI) and Number of Shares Traded (LNNST), they do not have a long-run relationship with the GDP and lack the power to determine it in the long run.

On the other hand, another variable, which was not statistically significant when using the OLS regression analysis, Government Spending (LNGS), seems to have a long-run co-integrating relationship with the level of GDP in the Saudi economy.

This however can be explained with the heavy presence of government sector in the economy financed through the large oil revenues, as despite the bourgeoning private sector, the public sector continues to patronise the economy through various means.

6.4.2. Model 2: NOGDP

In this section, the analysis is extended to the relationship between Non-oil GDP and stock market. However, as can be seen in table 6.10, the results suggest a similar relationship set, as the Number of Shares Traded (LNNST) and the Value of Shares Traded (LNVSTR) do not seem to have a relationship with the Non-oil GDP (LNNOGDP), whereas the Government Spending (LNGS) provides evidence of a long-run co-integrating relationship. As a result, it can be suggested that while the changes in Non-oil GDP are sensitive to changes in Number of Shares Traded

(LNNST) and the Value of Shares Traded (LNVSTR), this relationship is not significant in the long run, whereas in the long run, Non-oil GDP is rather defined by Government Spending (LNGS). This again provides evidence for the overwhelming role of the government in the economy, as the state remains the main stake holder in the creation and generation of wealth and its allocation.

Despite the results of the OLS regression analysis presented below, the strongest determinant of the long-run Saudi economic performance seems to be Government Spending (LNGS), as the results presented in tables 6.8, 6.9 and 6.10 suggest. These results could be discouraging for the development of the Saudi financial markets and their influence on the macroeconomic performance. However, the results also indicate that the performance changes are still influenced by the Number of Shares Traded (LNNST), Value of Shares Traded (LNVSTR) and General Index (LNGI) despite the fact that they may not be statistically significant.

Table 6.10: Johansen Co-integration Test

Despite the results of the OLS regression analysis presented above, the strongest determinant of the long-run Saudi economic performance seems to be Government Spending (LNGS), as the results presented in tables 6.7, 6.8 and 6.9 suggest. These

results could be discouraging for the development of the Saudi financial markets and their influence on the macroeconomic performance. However, the results also indicate that the performance changes are still influenced by the Number of Shares Traded (LNNST), Value of Shares Traded (LNVSTR) and General Index (LNGI) despite the fact that they may not be statistically significant.

6.4.3. Model 3: NOPSGDP

Further examination of the Non-oil Private Sector GDP (Table 6.11) produced evidence for the long-run co-integrating relationship between the various measures of the GDP of the Saudi economy and its Government Spending (LNGS), as the results depicted in table 6.11.

Table 6.11: Johansen Co-integration test Hypothesized

No. Of CE(s)

Eigenvalue Trace Statistics

Critical Value 5%

LNMCR None 0.264325 10.38950 15.49471

At most 1 0.118322 3.022280 3.841466

LNNST None 0.385135 12.16897 15.49471

At most 1 0.020475 0.496500 3.841466

LNVSTR None 0.445445 14.29818 15.49471

At most 1 0.006149 0.148026 3.841466

LNGI None 0.345998 12.32803 15.49471

At most 1 0.085175 2.136547 3.841466

LNNT None 0.378750 14.28194 15.49471

At most 1 0.112245 2.857439 3.841466

LNGS None 0.488407 19.50288 15.49471

At most 1 0.132721 3.417463 3.841466

6.4.4. Model 4: GFC

Further detailing the analysis by employing the Gross Fixed Capital (LNGFC) also provides a similar set of relationship between the independent variables and the dependent variable of LNGFC, which is depicted in table 6.12. The Government

Spending (LNGS) provides evidence that it is the only variable which has a co-integrating long-run relationship with the fixed capital accumulation of the Saudi economy. table 6.13 proves to be even more significant.

Table 6.13: Johansen Co-integration Test

LNVSTR None 0.330373 8.926195 15.49471 At most 1 0.004690 0.103431 3.841466

LNGI None 0.250681 6.566312 15.49471

At most 1 0.009829 0.217312 3.841466

LNNT None 0.425021 12.41769 15.49471

At most 1 0.010958 0.242412 3.841466

LNGS None 0.541891 19.30055 15.49471

At most 1 0.092127 2.126306 3.841466

As can be seen, the Government Spending (LNGS) is the only variable which has a long-run influence on the Gross Non-oil Fixed Capital of the Saudi economy. The influence of oil-revenues in the long-run is also evident in the much lower trace statistics of the other independent variables.

In summarising, in the light of the discussion and analyses above, it is evident that while the Number of Shares Traded (LNNST), the Value of Shares Traded (LNVSTR) and the General Index performance (LNGI) have statistically significant influences on the macroeconomic performance of the Saudi economy and cause fluctuations and changes, in the long run, the main variable defining this performance, however, remains to be Government Spending (LNGS).