Toward a new deal for Saudi Arabia: oil or Islamic stock market investment?

Amid the ongoing national development programme of Saudi Arabia, Saudi Vision 2030, a large trade openness plan to reduce Saudi Arabia’s dependence on oil and to diversify its economy is announced. This study investigates whether or not the related diversification option through openness towards the Islamic stock market would benefit Saudi Arabia’s economy. To this end, we consider data on oil price and Islamic stock investment, evaluate their interactions through vector autoregressive modelling and estimate the impulse response functions. Further, we perform portfolio simulations and measure further diversification benefits. First, we find that the risk of the economy’s dependency on the crude oil industry is not rejected, given the recent strong deterioration of oil returns. Second, the portfolio simulations highlight that the consideration of investment in Islamic stock shares not only generates diversification benefits but also provides a portfolio with the highest returns and lowest financial risk, for which we compute the optimal composition. Third, the analysis of the impulse response functions shows that the investment in the Islamic stock market in Saudi Arabia implies positive effects on the oil industry, which is a priori favourable to the recent challenge of undertaking the national development programme, Saudi Vision 2030.