Pre/Post Reforms:

H0: For the degree of the efficient market, there is significant change effect of reform for SSM, KSM and

DSM; and individual companies.

H1: For the degree of the efficient market, there is no significant change effect of reform for SSM, KSM and

DSM ; and individual companies.

This study has attempted to reveal whether the five individual companies of the SABIC, STC, NCCY, Al Rajhi Bank and Electricity Company and the stock exchanges of SSM, DSM and KSM have applied organizational improvements over the twelve years from (2005-2016) to become more efficient following the economic and regulatory events experienced between 2005 and 2011 known as the sub-period. This involved the use of the ARIMA model approach to test for relative weak-form efficiency, as well as forecasting accuracy.

It should mention that, the belief that efficiency level specifically influences macro-level reforms (factors) such as investor protection, transparency and stock market regulations, underpins the market efficiency indicators adopted in this research. Accordingly, the influence on stock market effectiveness of the correlation between efficiency and such reforms can be investigated. Consequently, market efficiency data will be significantly uncovered by assessing return share price trends. Greater share price return efficacy and lower volatility is expected to be linked to an increasingly efficient market, once an adequate market infrastructure is in place and legislative changes have been implemented. In this

regard, analysing the way in which emerging stock markets are affected by stock market reforms will be most open and direct.

However, it should be mention that, market reforms’ genuine impacts may be poorly understood if taken from the time at which they entered into effect, regardless of whether the return share price is directly altered by reforms. Given that, Strong sensitivity of stock markets is also apparent, with an incremental procedure of reform often being seen or economic changes typically occur following reformation of a stock market. Overall then, market reforms’ genuine impact will not be completely grasped if only taking reform implementation dates as the starting point. Accordingly, additional variables should be analysed in subsequent research.

It should be mention that, with stock returns potentially influenced by reforms; this has been controlled for in the research. One aspect of this is the assumption that as the reforms were introduced, other factors remained unchanged, allowing the impact of financial market reforms on stock prices to be explored using the theory. A second aspect is that the January 2005-December 2010 period that saw the foremost reforms is the sole timeframe being analysed, meaning that market reforms have a lower chance of affecting the economic factors outside of this timeframe. The third aspect is that the findings will be influenced by variables un-associated to market reforms, with data complexities being compounded as a consequence. However, the principal market studied is Saudi Arabia’s stock market, while Kuwait and Dubai’s stock markets that are characterised by similar economic variables provide the contrasting case, to diminish the chance of the findings being influenced by external variables.

It should be mentioned that, Within SSM or Saudi Stock Market, the CMA or Capital Market Authority was created in 2003, which attempts to increase public participation in financial markets, and promote greater transparency, fairness and efficiency with a regulatory and legal framework to open up the Saudi capital market. This contributed to improved regulatory supervision, and financial product choice and sophistication with greater depth and variety, and in 2007 restrictions on share ownership for GCC nationals were relaxed by the CMA (CMA, Annual Report 2007, 2008). In 20/10/2007, the Saudi Stock Exchange (Tadawul) launched a new electronic trading platform provided by OMX (NewGen), complete Equality between the Citizen of GCC States - Owning & Trading Shares and The Saudi Stock Exchange Tadawul Company was formed in March 2007 by the Council of Ministers, and the Tadawul is a joint

stock company and operates (Tadawul, Report 2007). Moreover, The CMA later announced that in 2008, foreigners or non-GCC nationals would be allowed to purchase shares listed on the Tadawul using Saudi intermediaries that were authorized with swap agreements (Tadawul, Annual Report 2008).

Regarding to DSM, established in March 2000, by 2007 it accounted for 49% of total market capitalisation and contributed 40% to the GDP following a rapid expansion (SCA, repot 2007). In addition, foreign direct investments have been encouraged through a privatisation programme by the UAE Government, and priority government projects have encouraged greenfield IPOs, such as for tourism, air transport, electricity and water supply and other public services and infrastructures for restructuring purposes described in the Strategic and Practical Information Business and Investment Guide produced by the United Arab Emirates Government(IBP, 2016). During the period from 2005 to 2007, 32 bilateral investment agreements were produced, which helped the stock market to become more efficient. Local crisis financial events during 2006 and the global financial crisis during 2008 affected the sub- period of SSM, DSM and KSM between 2005 and 2011. The objective of reforms in the capital market have been to present further protection for investors, encourage private investments, introduce new approaches of finance and investment, and improve the financial system’s efficiency as a tool of intermediation in the economy (Naceur et al., 2008).

This section investigates how the GCC stock market crisis in 2006 and the 2008 global financial crisis influenced these stock markets and individual companies, and to highlight how reforms have influenced the levels of efficient markets. Thus, the time series from 1 January 2005 until 31 December 2016 is divided into two periods by the researcher to be able to compare reforms pre- and post-financial crises, to discover the impact of reform and degree of evolving market by adopting degree of prediction.

Table 8. 4: 2005-2011 (Pre-Reforms): forecasting accuracy Statistics

Log -returns

SSM DSM KSM SABIC STC NCCY AL RAJHI

BANK ELECTRICITY COMPANY MAD 0.0076 0.0110 0.0040 0.0108 0.0086 0.0150 0.0090 0.0079 MSE 0.0001 0.0003 0.00001 0.0003 0.0002 0.0006 0.0002 0.0002 RMSE 0.0119 0.0160 0.0059 0.0164 0.0140 0.0238 0.0131 0.0127 MAPE 1.0271 1.0200 1.1062 0.9441 0.8994 0.8729 0.8776 0.8313

Source: Author’s own calculations

Table 8. 5: 2011-2016 (Post- Reforms): forecasting accuracy Statistics

Log -returns

SSM DSM KSM SABIC STC NCCY AL RAJHI

BANK ELECTRICITY COMPANY MAD 0.0133 0.0150 0.0062 0.0208 0.0148 0.0207 0.0171 0.0170 MSE 0.0004 0.0005 0.0001 0.0009 0.0005 0.0009 0.0007 0.0007 RMSE 0.0211 0.0214 0.0088 0.0300 0.0224 0.0304 0.0259 0.0269 MAPE 0.9221 0.9644 0.9891 0.9794 0.9623 0.9625 0.9999 0.7700 Source: Author’s own calculations

Table 8.4 shows the period from 2005 until the 2011 for pre-reforms. This period included two financial crisis events, Liberalization and change of software used by the stock market. The second period from 2011 until 2016 for post-reforms is shown in table 8.5 that highlights comparisons to show impact of change. However, the measure of error (MAD, MSE, RMSE and MAPE) is used to show the degree of production in table 8.4 and 8.5. The sample adopted in this study includes the SSM, DSM and KSM indices, and SABIC, STC, NCCY, Al Rajhi Bank, and Electricity Company as individual companies.

It is observed from these tables that over time in all return series, the degree of prediction changes substantially, and show values forecasting accuracy methods, and specifically significant change and improvement between different periods, so that for this study of a sample of all-market index and individual companies, the degree of efficiency has improved overall. This is shown in SSM in pre-reforms increasing MAD with 0.0076, MSE with 0.0001, RMSE with 0.0119 and MAPE with 1.02 to post-reforms for MAD with 0.0133, MSE with 0.0004, RMSE with 0.0211 and MAPE with 0.9221. This degree of efficiency is also improved for all individual companies and for DSM and KSM indices. Therefore, the null hypothesis is confirmed that reform has significantly improved the degree of efficient markets overall, but

when comparing Saudi share Market and the Dubai share Market with the share Stock Market, KSM shows less improvement.

Therefore, over the previous twelve years (2005-2016), the results for SSM, DSM and KSM markets indicate greater efficiency and increased levels of efficiency based on the reforms undertaken. Therefore, the markets and individual company have an evolving tendency towards efficiency. However, following 2011, price changes are not distributed randomly, and are not independent and do not fully reflect available information. These findings suggest that some returns could lead to abnormal profit making and arbitrage opportunities as they could be predictable, and have implications for regulatory authorities and investors, and contrary to RWH and EMH. The result suggest that internal market development reforms seeking to increase market capitalization, liquidity, automation of trading systems and the transparency have an impact on market microstructures by increasing efficiency and decreasing the volatility.

This finding confirms that of (Lagoarde-Segot, 2009), who assessed how financial reforms affect emerging equity markets’ time-varying microstructures during 1996 –2007. As per their findings, the political and economic climates influence the stock market microstructures and are considerably linked to each other as well as rely on particular institutional reforms. Moreover, (Arjoon, 2016) examined the impact of financial reforms and microstructures in an emerging equity market setting on time-varying informational efficiency. Their study determined that, in the long term, informational efficiency is significantly affected by microstructure variables such as total shareholders, volatility, liquidity, and automation. In addition, the time-varying model approach utilised by Ito et al. (2014, 2016) determined that the market efficiency changes as per the international stock markets with time. A study by (Budd, 2012) used the Variance Ratio Test and the Runs Test for evaluating the Saudi Stock Market’s weak form during April 2007– May 2011 and found that in the weak form, the Saudi stock market was inefficient. This study also noted that its infrastructure technology underwent considerable improvement and began providing evidence of weak form in other sectors.

Another study reports long-range memory exhibited by all MENA stock returns, and greater efficiency shown in certain markets, so that the stage of inefficiency could be explained by anti-self-dealing index, market capitalisation and trading costs (Rejichi and Aloui, 2012). More close study reveal that a generalised Hurst exponent analysis was adopted by (Sensoy, 2013)

to investigate MENA stock markets’ time-varying efficiency from 2007 until 2012 by using a rolling window technique for daily data. This study concludes that there were different degrees of long-range dependence over time that varied exhibited by all MENA stock markets. Lastly, Gu et al., (2013) whom investigated the Shanghai stock market by tested correlations between multifractality and efficiency. They found out that negative correlated before the equity division reforms in the efficiency in the Shanghai capital market.

In conclusion, as well as counteracting short comings of large individual trading and improving liquidity and transparency by spreading institutional trading and enhancing investment cultures, there remain demands to accelerate efforts to deepen and expand these markets. Therefore, it is important to obtain a better understanding of the relationship between market efficiency and market characteristics by analysing likely explanations that underlie these findings, and to help present recommendations for regulatory authorities. The researcher suggests that these two problems could be overcome by applying the Evolving Efficiency Test. This study attempts to highlight the sample of GCC stock markets and five individual companies to reveal weak-form efficiency dynamics, and to investigate if relevant financial crises, financial liberalization and reforms have influenced their efficiency, and the degree of this influence. It is proposed that these findings could support the work of regulatory policy makers to detect deviation from market efficiency causes, and how to overcome economic distortions.