| A literature review of the relationship between stock market prices and fundamental economic activities showed that there is a disagreement among economists about this relationship. Some studies show that there is a relationship between stock prices and fundamental economic activities, while others do not support this relationship.;The results of the cointegration analysis indicates that there exists a positive long-run relationship between stock prices and money supply, bank credit, oil prices and the Standard and Poor's 500 in all indexes. The Granger causality test results indicate that in the long run, there is a unidirectional causality from stock prices to money supply in the cement sector, electric sector, and agriculture sector, while a bidirectional causality is observed between stock prices and money supply in the composite index, the bank sector, industry sector, and the service sector.;The short-run causality showed different relationships among indices. While all variables: money supply, bank credit, oil price, and the Standard and Poor 500 Index caused movement in stock prices in the general index, none of these variables caused the stock prices in the electric sector index, and the agriculture index.;The innovation analysis tends to suggest that stock prices dynamically interact with their own macroeconomic factors. Most of the variation in stock prices in all indexes can be captured by innovation in itself as well as in money supply, bank credit, oil prices, and Standard and Poor's 500 Index, while the reverse also holds. The analysis suggests that the stock market in Saudi Arabia is not informationally efficient with respect to macroeconomic variables.;Utilizing the technique of cointegration, Granger causality based on the vector-error correction model (VECM), and the innovation analysis, this study investigates the long-run and short-run interactions between stock market prices and measures of aggregate real activity, including real money supply, bank credit, oil price, and the Standard and Poor's 500 Index in Saudi Arabia. Beside the composite index of the Saudi Stock Market, six sectional indexes, namely, the bank sector index, the industry sector index, the cement sector index, the service sector index, the electric sector index, and the agriculture sector index were tested for informational efficiency against these measures. |
