The Dynamic Effects of Economic Uncertainties and Geopolitical Risks on Saudi Stock Market Returns: Evidence from Local Projections

Ezer Ayadi () and Noura Ben Mbarek
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Ezer Ayadi: Department of Finance, College of Business, Imam Mohammad Ibn Saud Islamic University (IMSIU), Riyadh 11564, Saudi Arabia
Noura Ben Mbarek: Department of Finance, College of Business, Imam Mohammad Ibn Saud Islamic University (IMSIU), Riyadh 11564, Saudi Arabia

JRFM, 2025, vol. 18, issue 5, 1-35

Abstract: This paper examines the impact of various uncertainty channels on stock market returns in Saudi Arabia, with a focus on the Tadawul All Share Index (TASI). It examines factors such as Saudi-specific Geopolitical Risk, Global Oil Price Uncertainty, Climate Policy Uncertainty, and U.S. Monetary Policy Uncertainty. Using monthly data from November 1998 to June 2024 and the Local Projections (LP) methodology, the study examines how these uncertainties impact market returns across various time horizons, taking into account potential structural breaks and nonlinear dynamics. Our findings indicate significant variations in the market’s response to the uncertainty measures across two distinct periods. During the first period, geopolitical risks have a strong positive impact on market returns. Conversely, the second period reveals a reversal, with negative cumulative effects, suggesting a shift in risk–return dynamics. Oil Price Uncertainty consistently exhibits a negative impact in both periods, highlighting the changing nature of oil dependency in the Saudi market. Additionally, Climate Policy Uncertainty is becoming more significant, reflecting increased market sensitivity to global environmental policy changes. Our analysis reveals significant asymmetries in the effects of various uncertainty shocks, with Monetary Policy Uncertainty exhibiting nonlinear effects that peak at intermediate horizons, while commodity-related uncertainties exhibit more persistent impacts. These findings, which remain robust across various tests, offer critical insights for portfolio management, policy formulation, and risk assessment in emerging markets undergoing substantial economic changes.

Keywords: geopolitical risk; economic uncertainty; stock returns; local projections; Saudi Arabia; market efficiency; risk transmission (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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