Capital Market Liberalization: Effect of Foreign Investors on Saudi Stock Market Performance

This study aims to determine if a cause exists between foreign investors BUY and SELL and the Saudi stock market performance. The dependent variable is Saudi stock index represented by INDEX while the independent variables are buying for foreign investors, selling for foreign investors namely BUY and SELL. The research period starts from January 2008 to December 2018. Unit root tests with structural breaks based on Augmented Dickey-Fuller unit root test and Zivot Andrew unit root test, Co-integration analysis, and Granger causality tests were used to test 4 hypotheses stating no effect on Saudi stock market of foreign buy and sell. Results indicate the importance of foreign investors BUY and SELL to explain stock market movements. The study will guide Saudi policymakers, analysts, and financial institutions to benefit from the clear link between investors selling and buying and Saudi stock performance paving the way for Wise policies.


Background of the Study
The historical beginnings of the Saudi stock market are due to 1932 when the first joint-stock company was established in the Kingdom Saudi Arabia, the Arab Automotive Company, later; other companies were established during the seventies of the Gregorian, as the number of these companies increased. As the number of shareholding companies grew, a non-market emerged of shares in the early 1980s, until the order was issued High No. 1230/8 in 1984 regulating trading; the task of supervising and implementing market activity was assigned rules Ghassan and Alhajhoj [5] (2012) paper have examined the volatility in the Saudi stock market by examining the structural transformations, based on a daily database for the period (2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008)(2009)(2010). The results highlight that the period of openness to domestic and foreign capital is characterized by a more important flow of information. Further, it is proved that the access of foreign investors could reduce the return volatility of TASI, Tadawul All Share Index.
From this point, the study examines the impact of foreign investors' behavior on the performance of the Saudi stock market after its liberation. 1

The Historical Beginnings of Foreign Investors Entrance
The largest and most liquid in the Arab world, the $340 billion market was off-limits to anyone outside the Gulf, Saudi Arabia has guarded its domestic market against foreigners and prevented overseas companies to enter into joint ventures with local merchants, and its' stock market.
Since Almost $500 bn evaporated from the market's capitalization as a result of 2006 Saudi stock market crash, strategies to tame the Tadawul stock market's often wild fluctuations were implemented, and so that allowed international investors access the market [6].
The Program for Financial Sector Development 2020 has revealed that the program aims to raise the percentage of foreign investors' ownership of the total market capitalization of shares from 4% in 2016 to 15% by 2019 see [4].
The motivation behind the participation of foreign investors in emerging markets is portfolio risk reduction that is gained through global diversification.
Nevertheless, this reduction can be achieved as long as the correlation between countries is low [7].
"Stock returns are expected to be theoretically related to foreign investor transactions. This is not surprising since foreign investor participation contributes to risk diversification and stock market liquidity. A consistently base-broadening hypothesis also asserts that foreign investor participation improves risk-sharing and liquidity, which cause the required risk premium to decrease and stock prices to increase in turn" (AVCI, 2015, p. 32) [8].

The Problem Statement
The objective of the study This study aims to examine the expected causal relationships between buying of foreign investors, selling of foreign investors and stock market index performance in the Saudi stock market.

Research Questions
The search problem is determined by the following questions: 1) Are foreign investors' trade causes a change in stock market index return in Saudi Arabia?
2) Is the TASI index return cause a change in buying or selling behavior of 1 Indirect foreign investment by swap agreements started in 2008. Direct foreign investment in 2015.

The Relevance of the Study
This study is the first of its kind-to the knowledge of the researcher-which explains the capital market liberalization and the impact of foreign investors buying and selling in the performance of the Saudi stock market index TASI.
This study is useful to the Capital Market Authority to evolve new plans to develop the Saudi market by working on other mechanisms after the liberalization of the market to attract new capital and transfer knowledge and experience to local financial institutions and investors and raise the efficiency of the market.
The study also will enable the Ministry of Commerce and Investment and Saudi Arabian Monetary Agency to make optimal use of foreign entities as institutions or investment assets for the benefit of the investment sector in general and citizens (investors, employees, and customers) in particular.

Review of Literature
The study by Chan and Kwok [9] (2016) examines reforms of the stock market to observe and permit the subdivision of the Shanghai Stock Exchange's stocks for speculation by foreign investors. According to the predicted stats their theory, price reappraisal of investible stocks makes a directly proportional link with the reduction of systematic risk. This implication is examined by the use of 856 stock's sample in the Shanghai market, through which this study explores that in the duration of eight-month window among implementation and reform announcement, risk-sharing elucidates only one-fourth of the revaluation of the price of investible stocks. The evidence and information engendered by the modification and reform are more accurately priced into stocks having developed degree of market liquescent, information transparency, and global exposure and informed trading.
Study of Grosse and Trevino [10] (1996) explores contributing factors relevant to the elucidation of FDI in the United States by the investment and theoretical origin of the country. Information stats elucidates that exports of the country are more influential and significant to the market size of the home country and the United States. Significantly adverse impacts contain the exports of the home country from the United States, ethnic and geographic detachments of the home country from the United States, and the exchange rate (fx/$).
The research study of Onyuma [11]    Affected countries and three financial crises in different eras and exchange rate are explored by Lipsey [27] (2001) as it wrought in various forms apart from the forms of investment. Countries got affected due to direct investment inflows during exchange rate crises in Latin America, Mexico, and East Asia in 1982, 1994 and 1997 respectively. Countries' crises due to direct investment have been significantly alleviated than portfolio's inflows or any else investment form. Manufacturing affiliates of Unites States have transferred their sales from hosting countries to the markets exporting to a great extent with vitally different yet higher period than other host country's firms. They swapped from their markets partially by more abruptly curtailing their local sales, specifically in footings of U.S. dollar values. In those cases, where research contains the data, U.S. associates have also inclined to endure capital expenditure rate during crises.
David et al. [28] (2006) paper elucidate the influence of foreign ownership on investments strategies in various firms of Japan. Two contradicting views are being investigated by prior researches on such investors, first one is that their determined trading indicates the pressure for comparatively shorter returns that increase underinvestment and the second one is that their dynamic trading reaches towards appropriate investments. Research here studied the affiliation amongst strategic investments and foreign proprietorship analyzes vibrant data of a sample of 146 manufacturing firms of Japan for the period from 1991 to 1997. It is explored here that foreign ownership nurtures the strategies of investments to a vital extent, as with the growing opportunities of firms, results are more appropriate, unlike the situation where opportunities are not so high. Their research sums up that foreigner's ownership leads to appropriate investment.
Kim et al. [29] (2010) discuss their focus by two-dimensional aims and concerns. Theirs first finding is to expose the objective that either the meager corporate governance influences foreign investors' participation or not. The second objective here is to analyze the efforts of firm-level for improved corporate governance for foreign investments. Revised results discover that extraneous impartial ownership is damagingly allied with ownership attentiveness of firms, but it is positively linked with efforts of firms for improved corporate governance. Additionally, finding out that foreign investors occupy different patterns of conducts from their domestic equivalents, reveals less sensitivity towards corpo-rate governance than the. In addition to finds that foreign investors show different behavioral patterns from their domestic counterparts, as the latter group shows less sensitivity to the corporate governance issue than the prior group.
Probability for having an edge by domestic investors over foreign investors is discussed by Choe et al. [

Type of Study
The experimental research goal is to give conclusions about the causal relationships through the variables in the hypothesis of the research. In these researches types, the variables that are being studied are known as the independent variable and the dependent variable. The independent variable that been tested is the causing variable that the experimenter was manipulated by. The dependent variable in an experiment is a deliberate variable that is required to be impacted by the experimental control. The hypothesis of the research recommends that the created independent variable will cause changes in the dependent variables that were measured.
To achieve the objective of the study, the Granger causality method was used to investigate whether there is a causal relationship between buying of foreign investors, selling of foreign investors and stock index performance. The study was based on the quantitative method using time series [31] [32], by using Eviews 9.0 and Excel, the study used the monthly data from 2008-2018.

Research Model
In order to determine the causal relationships between foreign investors buy, sell where DU t denotes the dummy variable for the change in level (DU t (λ) = 1 if t > T λ , or 0 otherwise), DT t denotes the dummy variable for the change in trend (DT t (λ) = T t if t > T λ , or 0 otherwise), DT t is the so-called crash dummy supposed to capture a possible and sudden shift in the series DT t = 1 if t = T + 1, or 0 otherwise).

2) ADF Unit-root Test with Structural Breaks
Perron uses a modified Dickey-Fuller (DF) unit root tests that contain dummy variables to account for one known, or exogenous structural break. The breakpoint of the trend function is fixed (exogenous) and chosen autonomously of the data. Perron's (1989) unit root tests allow for a break under each of the null and alternative hypothesis. These tests have less power than the standard Dickey-Fuller type test when there is no break. In case of structural break ADF bias towards non-rejection of a unit root. Based on Perron (1989), the following three equations are estimated to test for the unit root. The equations take into account the existence of three kinds of structural breaks: a "crash" model (6) which allows for a break in the level (or intercept) of series; a "changing growth" model (7), which allows for a break in the slope (or the rate of growth); and lastly one that allows both effects to occur simultaneously, i.e. one time change in both the level and the slope of the series (8). ( ) where DU t (the intercept dummy) represents a change in the level; DU t = 1 if (t > TB) and zero otherwise; DT t (the slope dummy), also * t DT represents a change in the slope of the trend function; and zero otherwise; the crash dummy (DTB) = 1 if t = TB + 1, and zero otherwise; and TB is the break date. All of the three models have a unit root with a break under H⁰, as the dummy variables are inserted in the regression under H˚.
Whither H₁ is a broken trend stationary process.

Johansen Co-Integration Test
The first differences of the three variables used in the study after determining that they are. The possible co-integration between these three variables comes to test their relationship, Cointegration relationships between variables. In order to investigate, the Johansen co-integration test was preferred. The first differences of cointegrated I (1) variables structure the VECM, their lags, and some error correction terms. The Johansen test is used to test the relationships between l (1) stationary variables using the following VECM model.

VEC Granger Causality Test
To investigate the causal relationship between buying of foreign investors, selling of foreign investors and stock index performance in any direction. Researcher suggests Granger causality methodology be used.

Hypotheses and Conceptual Framework
The following hypothesis is formed: • Hypothesis 1: Foreign investors BUY Granger-causes INDEX.

Data Collection Method
The data used are secondary (Historical Market Data) extracted from Monthly Stock Market Ownership and Trading Activity Report "trading by nationality"

Population and Study Sample
The study sample consists of monthly data for foreign buy, sell and TASI index  Table 1 explain the descriptive statistic for these types:

Descriptive Statistics and Correlation
The research used monthly data. The time period is 2008:1 and 2018:12 (t = 132). Table 2 represented descriptive statistics related to variables.  Correlations of the variables are represented in Table 3.    Table 5 presents the Augmented-Dicky Fuller unit-root test results. According to Table 5, the three variables are not stationary in level (have a unit root), but after taking the first difference they become stationary. The null hypothesis of the series has unit root for ADF is rejected.

Cointegration Test
Lag length selection result is explained in

VEC Granger Causality Test
Based on the VEC Granger causality test that explained in Table 8, it can be said

Summary and Conclusions
This study aims to determine if a cause exists between foreign investors buy and sell and the Saudi stock market performance. This research applies the granger causality to study the relationship between foreign investors buying, selling and For a flourishing market, it needs to have firm infrastructure, great quality organizations and a well-working supervisory structure. Those things usually were missing in developing markets. Other research focuses to the significance of foreign investment as the supportive to the improvement of the bourses of the emerging markets [8]. Preference for greater accountability for foreign investors will encourage wider adoption of the CMA's code for transparency and disclosure [35].