Market Liberalization and Price Volatility: Evidence from the Saudi Stock Market

Abstract

The paper examines the impact of Saudi Arabia’s stock market liberalization in 2015 on stock market qualities, stock return, and price volatility, using a natural experiment relating to the selection of sectors for liberalization. A number of firms were inaccessible to foreign investors due to religious and political reasons, namely their locations in the holy cities. I establish that, within the same sectors, firms in the holy cities are not fundamentally different from firms elsewhere, and use the former as a control group for the latter in a difference-in-difference approach. I examine the impact of the Saudi stock market’s liberalization on returns and volatility for the treated firms, using trends in the control firms as the counterfactual. The results suggest that stock market liberalization did increase daily returns, for the first two years post-liberalization. The findings are robust and supported by a falsification test using data for prior periods.