Archives of Business Research – Vol.6, No.4 Publication Date: Apr. 25, 2018 DOI: 10.14738/abr.64.4438. Arabi, K. A. M. (2018). What drives Tadawul All Stock Index of the Saudi Stock Market? Archives of Business Research, 6(4), 176-190. What drives Tadawul All Stock Index of the Saudi Stock Market? Khalafalla Ahmed Mohamed Arabi College of Administrative and Financial Sciences King Khalid University ABSTRACT This paper aims to detect factors, which drive Tadawul All Stock Index (TASI) of the Saudi Stock Market during the period August 2005 May 2017. The application of Autoregressive Distributed Lag model (ARDL) and Bounds test revealed that there is no long-run relationship exist if consumer price index, interest rate, oil prices, general price level (P) and government expenditure are included in the model. While price- earnings ratio, nominal effective exchange rate (NEER), money supply (M3), and long term credit (L) relate significantly to TASI in both the short-run and long-run with an error correction term -0.22 i.e. disequilibrium takes four and half month to correct. Half of explanatory variables are fixed namely NEER, and L, while PE and M3 are dynamic. The GARCH model presented that news plays significant role in the volatility of stock market returns. Smaller GARCH term than ARCH indicates that a shock will take short time to die out. Key Words: ARDL, dynamic, fixed, GARCH, News, shock, volatility INTRODUCTION Stock markets play an unequivocal role in the economic activity serving as a mediator between lenders and borrowers. Stock prices are affected by expected returns and the discount rate which in turn influenced by macroeconomic variables (Kalyanraman and Tuwajin 2014). There two views referring to the relationship between stock market and macroeconomic variables, i.e. stock market is an indicator of economic activity if future performance of corporate and profits are reflected in prices, however the second one assumes the opposite, the stock market affects economic activity via aggregate consumption and investment (Ahmed 2008, Thaker 2009). Understanding the relationship macroeconomic variables and the stock market makes the government capable of stabilizing the stock market and the economy as a whole which attract investors and firms (Barakat, Algazzar and Hanafy 2016). The trading shares of Arabian Cement, the National Bank, Riyad Bank and the Dutch Bank founded on supply and demand without any official censorship or supervision before 1980's was the starting point toward full-fledged Stock market. The number of companies increased with time to inspire the government to form a joint committee from Ministry of Finance and National Economy and Saudi Monitory Authority (SAMA) in 1984 to be responsible for organizing and monitoring the stock trading. A year later SAMA became the only supervisor, and in 2003 the Capital Market Authority `was established (Jarrah and Saleem 2016). The introduction of the first electronic trading system integrated for settlement and clearing was in 1990. Saudi Stock Exchange (KSE) is ranked as the second largest in Gulf Cooperative Council (GCC) in terms of market size. Listed comprises dealing in free floating shares that determine TASI performance are 163. Many empirical researches identified factors manipulating the behaviour of Tadawul All Stock Index and recognized different sets of variables. The aim of this research is to answer the following question: what drives TASI of the Saudi Stock Exchange?