The Adaptive Market Hypothesis for the Saudi Stock Market: A Sectoral Indices Analysis

Abstract This paper tests the adaptive market hypothesis for the Saudi Arabian stock market. By applying the automatic portmanteau and variance ratio tests, the degree of time-varying return predictability of market and sectoral indices is evaluated, in comparison to that of the oil market. Daily data from 2010 shows that the Saudi Arabian stock market has been mostly efficient over time, exhibiting a low degree of return predictability. Furthermore, we find that this degree of efficiency is closely related to that of the oil market. However, in contrast to the stock market, the oil market is found to be relatively inefficient with a much higher degree of return predictability. Finally, we find that the degree of stock return predictability is partly driven by macroeconomic variables such as inflation and interest rates.