Abstract

This paper analyzes the drivers behind foreign institutional investments (FIIs) in the Saudi stock market and their impact on market stability from 2015 till 2019 using quarterly data. The results of OLS panel regression and ARCH/GARCH model support the feedback trading hypothesis and reveal a herding and momentum behavior of foreign institutions. Foreign institutions are attracted to invest in large Saudi firms with high liquidity. Interest rates, GDP growth and oil prices all have a negative and significant impact on FIIs. In contrast, inflation indicates economic growth and has a positive impact on FIIs. FIIs tend to stabilize market returns and predict future values.

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