Abstract/Summary

This thesis examines investor behaviour in the Saudi stock markets (SSM), with a focus on various psychological and behavioural aspects such as the disposition effect, herd mentality, and investors’ inclination toward Shariah-compliant investments. These three areas collectively examine the psychological and behavioural dimensions underlying market participants’ regret aversion and fear of missing out within the context of the SSM including the associated market anomalies and behavioural biases. Following a brief introduction (1), the research findings that contribute to the existing literature are discussed and explored in Chapters 2, 3, and 4. Chapter 2 concentrates on investigating the presence of the disposition effect in the SSM by analyzing the trading behaviours of large brokerage retail investors and equity mutual fund managers during two distinct periods: the holy month of Ramadan and the COVID-19 pandemic. Utilizing a novel dataset of daily trading records from 2019 to 2021, the study identifies notable differences between investor types. Mutual fund managers consistently demonstrate a preference for realizing losses over gains while brokerage investors exhibit more heterogeneous behaviours, mainly showing no preferences for either stock gains or losses. Additionally, a panel event study reveals that Ramadan fasting does not significantly alter disposition-driven trading, but the COVID-19 pandemic significantly impacts the trading patterns of both investor groups. Chapter 3 examines herding behaviour in the SSM around the inclusion of its main market (Tadawul) in the global Emerging Market (EM) indices, a major milestone in Saudi capital market reforms under Vision 2030. Using three unique stock market portfolios and applying established herding detection models, the analysis reveals persistent herding behaviour before and after inclusion, particularly among local investors. However, herding behaviour within the set of stocks accessible to Qualified Foreign Investors (but still available to local investors) becomes statistically insignificant following the inclusion, except when the market is experiencing downturns. Further analysis suggests that while intentional herding predominates, spurious herding arises among local investors, especially during declining markets following the SSM’s inclusion in EM indices. Chapter 4 attempts to develop a regret-augmented portfolio optimization framework to quantify the psychological cost of regret faced by Shariah-compliant investors in the SSM. Using daily stock data from 2018 and 2023, the study compares strict and moderate Shariah adherence scenarios by constructing optimal portfolios under both constraints. Based on the 2018 model results, strict Shariah-compliant investors face an opportunity cost of 0.333 to 0.712 Sharpe ratio points while moderate adherents incur a lower cost between 0.324 and 0.404 points. When regret aversion is incorporated into the optimization, the preference regret model delivers the best trade-off between Shariah compliance, portfolio performance and risk management. The findings highlight that regret aversion significantly shapes asset allocation decisions and that behavioural models better capture investor preferences than the classical Markowitz framework. The findings are further validated using 2023 data, which confirm similar trends to 2018, though the impact of regret aversion is less significant due to more favourable market conditions seen during the year 2023.