RESEARCH METHODOLOGY:

The study aims at finding out the relation between the two stock markets and how they are affecting each other. Granger Causality, Johansen co integration Test, Principal component Analysis and Moving average method have been used to study the relation between the two markets. The study period is from 7^th March 1997 to 7th March 2017.The two economies are the world biggest oil exporters. One being OPEC nation and the other being Non-OPEC nation. Since the focus of the study is the Russian Stock Exchange and the Saudi Arabian stock exchange and both are Oil Economies, so the suitable test to establish a relationship between the two is Granger causality which has been used to find out the driver and the driven pattern between the two markets.

Moving Average has been used because it is one of the technical indicators which help in finding out the direction of current trend. Moving Average is the result of the average of the past data points. So irrespective of the driver and driven relationship TASI and MICEX follow the moving average pattern. Johansen Co integration test is used to find out the linkage, relationship or the bonding between the two Oil Economies in the long run or the short run. If there exists a relationship that means they are cointergrated so is it for a short period of time or for a longer period of time

LITERATURE REVIEW:

Russia is driving the oil market because it is a Non OPEC member and lastly after 8 years it has agreed to slash the oil production to help the OPEC community. Same is evident from the Granger causality test which shows that Russia is driving the Oil market and same is visible from the result. Oil being an important commodity its production cut will have a bullish trend for the Oil markets. Saudi Arabia is one of the most significant players in the oil markets. The country produces more than 10% of worldwide oil. But things aren't as pretty as they seem. Saudi Arabia Ghawar fileds are facing extreme pressure in meeting the oil demand which may lead to depletion of the oil in these wells. Russia on the other hand will see oil demand continue at the same level while gas will enjoy a growth.

A researcher of repute (Fahd M. A;turki, Asad Khan, 2015), The Saudi Economy in 2017 states that the oil sector will show a negative growth due to the slashing of Oil Production as agreed with the OPEC community. This is causing the negative impact on the economy and it will bring down the growth. Growth in the Non-oil sector will rebound after 25 year low but will be relatively low as it will be offset by the fiscal deficit .Mining sector is showing a growth of 7.5%, which is the fastest growing sector of 2017. Since it is an Oil kingdom so a sustained period of low oil prices will lead to a fiscal deficit which could be higher than forecasted. The government funding to non-oil sectors shows the Government willingness to support other sectors to make up for its deficit as the Global sentiments may damage the investment sentiments. Since it is an Oil Economy and due to cut in the Oil production the Government has to look for other sources of revenue.

Figure 1 source: Comparison of Crude Oil Production of Russia and Saudi Arabia (BBL/D/1K) Trading Economics.com |US Energy information Administration

Deloitte report on Russian oil and Gas outlook survey 2017, shows that the Oil and Gas companies are expanding their base in the years to come. Russia’s largest Oil producer Roseneft has signed an agreement to acquire a stake in Essar Energy Holding for the Asia Pacific Region. It is also in talks to enter the International market for Gas by participation in the Project Sohr in Egypt by buying a 35% stake in it and also acquire stake of 15% into a 50/50 joint venture between Eni(Italy) and EGAS(Egypt). International Energy Agency in its report about Russian Oil Market has shown that the commissioning of new wells have increased by morer than 15% and increased output from these new wells like Suzun and Messoyakha and output from the Yuganskneftegaz, Nyaganneftegaz, Samaraneftegaz, Varyeganneftegaz fields. Since the Saudi oil reserve will dry out there is an environment of uncertainty and hence there is a situation of overestimation and volatility whereas the Russian oil production will boom in the future so they will emerge as the key performer and are hence will be the market drivers in the Oil game.

Denning,Liam (2017) in his article in Bloomberg showed a discrepancy in the Saudi Arabia production numbers. Two sets of report are published by OPEC one with the data provided by the members and the other with the data obtained from secondary sources. The two reports had a different story to tell. While the data obtained from secondary sources showed that the Saudi Arabia output was declining by 68,000 barrels per day but the country claimed it had boosted it by 263000 barrels per day.

Saudi Arabia is caught up in a position where if it cooperates with the OPEC members and cuts down production then it is encouraging dampening demand and the rival supplies. But instead if it does the reverse and sped up production then Oil prices would fall and this would help the market forces.

Oil revenue is the major source of revenue contributing about 45% to the GDP of the country (DEVAUX, n.d.)in his report on Saudi Arabia tough times highlights the facts that the drop in oil revenue had a major impact in the economic growth in 2016.. So for the economy to grow and continue government started spending on the infrastructure sector with investment rising from 18% to 23% of non-oil GDP.Decline on the oil production and growing financing needs of the economy have resulted in the decline of bank deposits. Bank deposits had grown multiple times during the period of High Oil prices.

Due to a sharp decline in the oil prices from $115 per barrel in June 2014 to under $35 in February 2016 was the cause of change of direction for earning revenues.(Rosamond Hutt, 2016) in his article which economies are more reliant on Oil states that the Saudi Arabia wants to end it “addiction to oil” by restructuring the government and preparing for a post petroleum era. The Kingdom is preparing for a new economy under it’s vision 2030 where it is less dependent on falling oil revenue in the coming decade and half. As stated by the Prince Mohammed bin Salman “We have developed a case of oil addiction in Saudi Arabia. Since revenue from the Oil exports contributes to 90% of the exports earnings and 45% of the GDP and due to decline in the oil prices the revenue has been heavily impacted and has led to budget deficit leading to the depletion of the country’s reserves”.

An Indian researcher of repute (Ghosh, 2015) in his study “A Statistical Analysis of the Stochastic Drift between Sensex and Nifty- an in-Depth Study” highlights some interesting facts about the behavior and predictability of the stock market. BSE 30 and NSE 50 stocks have taken for study and the study period is from 29^th October 2013 to 18^th August 2014.The study aims at finding whether the Nifty and Sensex move along the same direction and identification and driver and driven index patterns through waveform analysis. Granger causality has been used to find out the relationship between the two markets and the results shows that Nifty and Sensex do not have common stochastic drift.

STUDY:

Figure 2

In the above figure the result of Granger causality Test is shown.

Figure 3

X= Russia Stock Market (MICEX)

Y= Saudi Arabia Stock Market (TASI)

Table 1

Granger Causality Test: Y = f(X)
Model	Res.DF	Diff. DF	F	p-value	Occurrence
Complete model	4973
Reduced model	4974	-1	8.498289	0.003571	99.64%
Granger Causality Test: X = f(Y)
Model	Res.DF	Diff. DF	F	p-value	Occurrence
Complete model	4973
Reduced model	4974	-1	0.025374	0.873445	12.66%

It can be seen that MICEX is dependent on TASI for 12.66% of the outcomes under the Bivariate Granger Causality Test. In the similar test it can be seen that TASI is dependent on MICEX for 99.64% of the time.Here we see that the Russian Stock Market (MICEX) is the driver and Saudi Arabia Stock Market is said to be the driven.

Figure 4

Interpretation:

Both the countries are following a moving average pattern independent of the fact that who is the driver and who is driven.

Table 2

	TASI	MICEX
Std. Deviation	3734.587	655.272
Skewness	0.913741	-0.16385
Kurtosis	3.867082	1.51434
Jarque-Bera	848.4793	479.9855

Interpretation:

· Kurtosis is high for Saudi Arabia Stock Market (TASI) than Russia Stock Market (MICEX) which means TASI has heavy tails or outliers and lower value of kurtosis for tends to have lighter tails or lack of outliers.

· Skewness is the measure of the symmetry a data set is said to be symmetric if it looks the same it will have a skewness of near about zero. Normal Distribution has a skewness of zero. Here MICEX has a negative value of skewness which means that the data is skewed to the left and has long tails relative to the right tail. It is a leptokurtic.

· It has been seen that leptokurtosis arise from a pattern of volatility in the market where periods of high volatility are followed by periods of relative stability.

· The higher the kurtosis the more likely that future returns will be either extremely large or extremely small. Kurtosis is often called as volatility of volatility. It is a case of overestimation

· Russian stock market can be predicted because kurtosis is low for it is mesokurtic

JOHANSEN CO INTEGRATION TEST

Figure 5

Trace test means that whether the impact will remain same or reduce with time. Trace statisticsvalue (12.52296) is lesser than the critical value (15.49471) so the trace test fails this implies that Saudi Arabia Stock Market (TASI) and Russia Stock Market (MICEX) will not be linked for a longer period of time or we can say that the bonding between the two marketswill have a shorter life span. So we conclude that the Trace test shows no cointegration at 0.05 level.

Figure 6

There are two factors PC1 and PC2.

PC1 or F1 is the major factor and the driver and contributing 90.09% and the other 9.91%.

PC1 and PC2 both are same so there exists financial irregularity and trace of man-made data has been found.

ANALYSIS OF STUDY:

The Granger causality test clearly shows that MICEX is the driver and TASI is the driven market as Saudi being an Oil driven economy .Due to cut in the Oil production because of the agreement between OPEC countries has led to the decline in production of Oil and this had a negative impact on the Saudi economy and Russia being a Non-OPEC nation had also agreed to the cut in Oil production, but Russia is trying to expand its oil reach. The higher the value of kurtosis for Saudi Arabia clearly shows a case of overestimation because though the economy is declining due to its dependency on the oil revenue and the volatility in the returns. TASI is showcasing an unpredictable behavior whereas the opposite is true for Russian stock market (MICEX).

Johansen co-integration test show a weak bond between the two markets that means the co-integration between the two markets is short lived .i.e. it would not last long as Saudi Arabia is trying to remove it’s dependency on the Oil sector and is looking for options to diversify whereas Roseneft, one of the largest Oil producer in Russia is trying to expanding into Asia Pacific region and entering into joint venture into Egypt. Principal component analysis highlights an important fact that financial irregularity has been found and evidence of man-made data exist.

ANALYSIS FROM LITERATURE REVIEW:

Since both are the oil economies and Saudi Arabia is an OPEC member and Russia being a non- OPEC members (Organization of the Petroleum Exporting Countries).Among OPEC members, Saudi Arabia is the largest crude oil producer and exporter. Saudi Arabia is expected to cut exports 10% to North Asian refiners in September 2017 due to OPEC’s production cut deal.

Since Saudi Arabia is an oil driven economy the cut in the Oil production has hampered the growth of the economy since Oil contributed to more than 45% to its GDP whereas the major contributor for Russia was the mining sector and since it has now entered the Oil sector.

Saudi Arabia is trying to come up with the ways to diversify the earning of the economy because of the increased unemployment rate among the youths , (Steven Mufson, n.d.) In his article “Saudi Arabia, a kingdom built on oil, plans a future beyond it” states that the oil kingdom is trying to look beyond the Oil options to generate revenues as the crash in crude oil prices has crippled the growth of the economy and has led to a budget deficit. The country in order to make up for it has profound plans to implement it’s vision 2030 which calls for investing in private business, cutting on subsidies to reduce budget deficit and introduction of 5% value added tax.

The government has decide to come up with Multi-billion dollar Islamic bond and IPO of the Saudi Aramco, is the world largest producer of Oil , could be a game changer for the Saudi economy as the company is believed to be worth over $ 2 trillion. The proceeds from the IPO will be put in the Saudi Public investment fund for financing public projects to remove the dependency on the Oil sector.

As per an article on the Russian economy by World Bankit has tried to cope up with the cut in oil prices, but the market is growing gradually and a moderate growth rate of the economy is projected. The World Bank has collaborated with Russia on 9 projects focusing on statistics, judicial reforms, public financial management, and financial literacy.

The tight monetary policy by the bank of Russia has helped to tackle the average inflation rate from 15.6% in 2015 to 7.2% in 2016 as depicted in the Russian economy report by World Bank. Expenditure cut by the government. FDI inflow increased because of the privatization of the Roseneft oil wells and so in the Non-banking sector the net capital outflow decreased from US$4.1 billion to US$20.4 billion. Due to sustained decline oil production had led to the depreciation of the Russian ruble but the when the oil economies both OPEC ns non-OPEC nations reached an agreement regarding the oil production supported the appreciation of the currency.

CONCLUSION:

Abundant supply of Oil constitute the basis of the modern economy but in the study of the TASI and MICEX we found that Saudi Arabia is trying to speed up its economic growth by diversifying from being an oil bound economy and pursuing its vision 2030 and the Russian is pursuing policies to cut up expenditure and increase its oil production. Which has led to the short term relationship between the two markets. The driver and driven relationship is evident from the chart shown below as the Russian economy is leading the show in terms of GDP and ways to maintain it.

Figure 7 Source: Trading economics.com

The above figure shows the GDP comparison of Saudi Arabia and Russia. From the above figure it is evident that GDP of Russia is more than the GDP of Saudi Arabia which is due to the fact that Russia is investing hugely in oil and whereas Saudi Arabia, once an oil driven economy is diversifying, is trying to reduce its dependency on Oil which was once a major contributor to its GDP.

LIMITATIONS:

Different statistic process could be used like Partioning around method (PAM) which is another effective method of clustering.

TEACHING NOTES:

There is driver and riven relationship between the TASI and MICEX. MICEX being the driver and TASI is dependent on MICEX for 99.64% of the times. The co integration between the two markets is short lived and may not hold true in future.

KEY TAKE AWAY:

There is short bond or linkage between TASI and MICEX which may not hold strong in future. Moreover, Russian Stock market is driving the Saudi Arabia stock market.

FURTHER SCOPES OF RESEARCH:

Fuzzy Neural Network and Artificial Neural Network could be used for the same study and see a different perspective.

REFERENCES:

1. Devaux, P. (N.D.). Saudi Arabia Tough times Cutbacks in public expenditure. Retrieved from http://economic-research.bnpparibas.com/Views/DisplayPublication.aspx?type=documentandIdPdf=29001

2. Fahd M. A; Turki, Asad Khan, R. A. (2015). The Saudi economy in 2015, (January), 1–23.

3. Ghosh, B. (2015). A Statistical Analysis of the Stochastic Drift between Sensex and Nifty- an in-Depth Study Abstract : International Journal of Innovative Research and Development, 4(5), 12–16. https://doi.org/10.2307/1905515.E.L.

4. Rosamond Hutt. (2016). which economies are most heavily reliant on oil? Retrieved September 21, 2017, from https://www.weforum.org/agenda/2016/05/which-economies-are-most-reliant-on-oil/

5. Steven Mufson. (n.d.). Saudi Arabia, a kingdom built on oil, plans a future beyond it - The Washington Post. Retrieved September 25, 2017, from https://www.washingtonpost.com/business/economy/saudi-arabia-a-kingdom-built-on-oil-plans-a-future-beyond-it/2017/04/21/6574d2ee-251a-11e7-bb9d-8cd6118e1409_story.html?utm_term=.8c6f93f14171

6. version 1.1.23-r7, URL http://www.wessa.net/

Received on 09.10.2017 Modified on 05.12.2017

Asian Journal of Management. 2018; 9(1):413-418.

DOI: 10.5958/2321-5763.2018.00063.X