Abstract:

This study investigates the relationship between stock market capitalization and economic growth in Saudi Arabia. The study encompasses capital formation in a trivariate system for the period covering 1985 to 2012.The study employed the unit root tests and applied Johansen co-integration to investigate cointegration among the variables under study.Granger causality test is employed to identify the direction of causality among the variables. Vector Autoregressive Model reveals the existence of relationship between economic growth and stock market capitalization. The results of Granger causality tests manifest that stock market capitalization and capital formation causes economic growth in the Kingdom of Saudi Arabia. Further the stock market capitalization also causes the capital formation in the economy. Based on these outcomes, it can be cogently deduced that further development of Saudi stock market shall go a long way to substantiate the pace of the growth of the economy. Key Words: Saudi Arabia, Stock market development, economic growth, Causality, VAR.

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