In previous posts I talked about how the Saudi Market (Tadawul) is correlated to Oil price and to major international indexes such as the Dow Jones Industrial Average. I decided to quantify that phrase and statistically test the relationship.
I collected a sample of daily change in prices since beginning of 2007, and came out with the following conclusions:
- Correlation between Tadawul and Oil (WTI) is 0.79
- Correlation between Tadawul and (DJIA) is 0.77.
Performing a regression for the data in these variables leads us to the following conculsions:
- Oil price movements explain 62% of Saudi Tadawul index movements
- DJIA movements explain 59% of Saudi Tadawul index movements
The data above suggests that the Saudi Tadawul index is significantly affected by changes in oil prices and the DJIA. Consequently, traders and investors in the Saudi market should keep a close eye on those two variables.
Although many papers have been published on this subject, I believe that personally performing the regression simultaneously stops me from questioning the statistics and fulfills my curiosity on the matter.
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Loading ...Tags: Dow Jones Industrial Average, Oil, Saudi Arabia, Saudi Stock Market, Saudi Tadawul correlation with oil and dow jones, Tadawul all share index
Although your sample years are short, I guess they suffice because during these 3 years we’ve seen $145 and $35 oil prices. I always thought the correlation was greater for some reason!
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The regression only says they tend to move together and not that one is affected by the other. there could be a third variable that affects them all. second, we need to know if the relationship holds for longer periods and the lead or lag relationships. cus we want to look at the indicator that leads Tadawal, otherwise we cant claim anything that benefits us. thirdly we now need to forecast oil and DJIA also (mean more work).
while it may have fulfilled your curiosity, it just sparked mine.
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Thanks Syed Amir for the comment!
Correct me if I’m wrong, but from what I read from the one regression book I ever tried to read that the recommended sample data is 120 weeks which is 2.5 years, thats why i used the beginning of 2007. And from what I understand is that covariance measures the tendency of two variables to move together, but the R^2 or the oefficient of determination, It provides a measure of how well future outcomes are likely to be predicted by the model.
Wikipedia explains the R^2 as :
“R2 is often interpreted as the proportion of response variation “explained” by the regressors in the model. Thus, R2 = 1 indicates that the fitted model explains all variability in y, while R2 = 0 indicates no ‘linear’ relationship (for straight line regression, this means that the straight line model is a constant line (slope=0, intercept=) between the response variable and regressors. An interior value such as R2 = 0.7 may be interpreted as follows: “Approximately seventy percent of the variation in the response variable can be explained by the explanatory variable. The remaining thirty percent can be explained by unknown, lurking variables or inherent variability.”"
And for the third point, fundamentally speaking I think that forecasting the Oil prices is a must in determining Tadawul’s movements as Saudi GDP is highly dependent on oil prices, and that Sabic and other large cap companies in the market are in the petrochemical industry, so by default they are effected by oil price movements. As for the DJIA I think its a more of a psychological thing, though fundamentals are also apparent.
Regression is a subjective way of looking at things, and results may change by time.
But thanks for the comment and if you have anything to add to correct my information for my own benefit and the benefit of the reader please feel free to do so
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[...] I posted a while back about the correlation between oil prices and the Saudi Stock Exchange “What Moves the Saudi Tadawul Index?” and we calculated that they are highly correlated (0.8). As seen in the chart below, the [...]
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