Essays on Momentum, Autoregressive Returns, and Conditional Volatility: Evidence From the Saudi Stock Market

ESSAYS ON MOMENTUM, AUTOREGRESSIVE RETURNS, AND CONDITIONAL VOLATILITY: EVIDENCE FROM THE SAUDI STOCK MARKET Abdullah Alsubaie Old Dominion University Director: Dr. Mohammad Najand The objective of this dissertation is to examine different aspects of return behavior and provide an out of sample evidence from the Saudi stock market (SSM). It consists of three essays. The first essay is organized into two parts. In the first part, I investigate the relationship between momentum profitability and trading volume in the SSM. The objective of this part is to find out whether momentum strategies exist in the SSM and whether trading volume affects momentum profitability. In the second part, I investigate whether a 52-week high price momentum profitability exists in the SSM. The empirical results document the existence of price momentum strategy in the SSM. In addition, the momentum strategy is more profitable when it is conditioned on high volume stocks than when it is conditioned on low volume stocks. High volume winner portfolio drives the momentum profit in the SSM. However, the results on the 52 week-high price indicate a reversal in portfolio returns which contradicts the results of earlier study conducted in the U.S and Australian markets. The second essay examines the relationship between abnormal changes in trading volume of both firms and portfolio levels, and the short-term price autoregressive behavior in the SSM. The objective is to investigate the informational role that trading volume plays in predicting the direction of short-term returns. I evaluate whether the Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. abnormal change in lagged, contemporaneous, and lead turnover affects serial correlation in returns. Consistent with the prediction of Campbell, Grossman, and Wang (1993) model, the result of this essay indicates that lagged abnormal change in trading volume lead to reversal in consecutive weekly returns. Contemporaneous and lead changes in volume provide mixing results. The third essay tests the effect of trading volume on the persistence of the time varying conditional volatility in the SSM. I utilize GARCH models to test the persistence of return volatility without volume, with contemporaneous volume, with lagged volume, and with two other alternative proxies of volume. This approach is applied to the market index, five industry indices, and 15 individual companies. In addition, this essay investigates the volatility spillover between size-based portfolios in the SSM using a twostage GARCH approach. The results indicate that the SSM exhibit strong volatility persistence; however, when I include contemporaneous volume, the persistence vanishes, indicating that the rate of information arrival measured by the volume series can be a significant source of the conditional heteroskedasticity in SSM. The results show that the spillover effect is larger and statistically significant from large to small firm portfolios. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. © Copyright, 2007Abdullah N. Alsubaie. All Rights Reserved. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.