SAUDI ARABIAN COMMERCIAL BANKS’ MARKET-RISK SENSITIVITY: INTRODUCTIONDespite the effects of the Global Financial Crisis (GFC) that shook the banking sectors of the industrialized countries, the Saudi commercial banks continued to maintain a strong financial position. Several factors seemed to have contributed to thisapparent robust position.Initially the combination of expansionary fiscal measures and the government’s guarantee to safeguard depositors’ money provided re-assurance in such a fragile economic climate of international contagion. Within the banking sector measures were also taken by Saudi Arabian Monetary Authorities (SAMA) to enhance banking liquidity and improve risk management systems at commercial banks. In addition theSaudi’s banks’ own efficient management of their financial resourcesmay have also contributed to avertingthe full adverse impacts of the GFC on the Saudi commercial banks. The purpose of this paper therefore is to explore this apparent robustness of the banking sector risk-return relationships via the Saudi Arabian Stock Market.Using a rolling regression econometric technique, a more accurate dynamic observation of the daily swings caused by market-moving events over time can be measured.This paper in particular, captures the listed banks’systematic risk during the crucial, turbulent, and now historical events from the 2008 global financial crisis, through the 2009 recovery period to the 2011 Arab Spring period. further
A fundamental question in finance is how the risk of an investment should affect its expected return? Not all risks affect asset returns, some are diversified away. The remaining risk is market or systematic risk. This risk affects all firms and is unavoidable for investors. It can be caused by changes in long-term interest rates, inflation rates or other such macroeconomic shocks which can influence expected returns. It is therefore crucial for investors and financiers alike to understand the amount of unavoidable risk they are exposed to. One such indicator is the estimation of the coefficient beta, developed in the 1960s as a component of the Capital Asset Pricing Model (CAPM) by (Sharpe, 1964), (Lintner, 1965)and(Mossin, 1966). Beta provides a measurement of the risk-return sensitivity between a stock/sector and the overall market.The contribution of this research is to measure the sensitivity of banking market risk-returns by calculating the intertemporal coefficients of beta and alpha based on the Saudi banks’ stock prices, the Banks and Financial ServicesIndex (TBFSI), and the Tadawul All Shares Index (TASI)for the period June 3, 2008 to October 5, 2011.The beta measurement is one of the most recognized and frequently used tools in the field of finance. The measurement of beta enables the required return to be calculated by investors, the cost of capital to be estimated by firms seeking finance, and provides a guide for fund managers in the composition of an appropriately diversified portfolio. Beta also enables the calculation of alpha (excess returns over the market) which is a key financial measurement used to benchmark portfolio performance.
The incentive behind this research is driven by the fact that in well-established financial markets, beta is calculated and commonly made use of by financial analysts and academics for portfolio management decision making and performance measurement. However in the relatively new financial market of Saudi Arabia, the beta is not yet commonly used in financial reporting and analysis. The very nature and global importance of these new emerging markets necessitates the need for such calculations for greater transparency, improved efficient allocation of capital as well as establishing a benchmark for future equity analysis. It is against this background that a series of research questions emerge concerning the impact of systematic risk and the sensitivity of each banks’ risk-return relationship to the broader TASI market over the period 2008 to 2011. Is the beta coefficient (market risk) stable within each bank and within the banking sector (TBFSI)over time? How plausible is the assumption that a single low beta estimate signals a low risk investment strategy? Are banks and the banking sector (TBFSI) returns over-valued or under-valued? Ultimately, did the GFC affect the Saudi banking sector?
The following section provides abrief background of the Saudi Arabian Capital and Money Markets. A Literature Review follows. Section four describes the data and methodologies used in this study. Section five reports the analysis and results. Finally, section six provides discussion and concluding observations.

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