This study investigates regime-dependent forecasting of the Saudi stock market by combining macro-controlled dependence analysis with nonlinear predictive modeling. Using daily data from September 2010 to August 2025, we analyze the interaction between the Tadawul All Share Index (TASI) returns and crude oil returns while controlling for inflation and interest-rate dynamics. A four-variable VAR with macro controls is estimated separately in pre- and post-COVID regimes to characterize directional predictability and changes in transmission lags. We then evaluate out-of-sample return forecasting performance across econometric benchmarks (ARIMA, ARIMAX, and VAR) and machine learning models (LSTM and XGBoost) under a strictly time-ordered expanding-window design with sequential train/validation/test partitioning. The results indicate that traditional linear benchmarks exhibit limited predictive ability in both regimes, with negative out-of-sample explanatory power. By contrast, XGBoost delivers the strongest overall performance, achieving positive out-of-sample R2 in both regimes (0.046 in pre-COVID and 0.010 in post-COVID), together with the lowest forecast errors (RMSE = 0.0081 pre-COVID; 0.0078 post-COVID). Interpretability analysis further reveals a regime-sensitive shift in drivers: short-horizon equity lag dynamics dominate during stable periods, whereas oil-related and macro-financial variables gain importance under turbulent conditions. Economic-value evaluation supports the practical relevance of these gains, showing that XGBoost-based signals yield superior risk-adjusted trading outcomes and remain favorable under downside-risk and drawdown-based assessment. Overall, these findings highlight that forecasting in oil-linked emerging markets is inherently regime-dependent and that nonlinear ensemble learners, particularly XGBoost, provide a more robust and economically meaningful approach under structural change.
Aggarwal et al. (Tue,) studied this question.