Impact of oil price and market volatility on the relationship between Saudi stock prices and illiquidity

This study examines whether stock price sensitivity to illiquidity shocks changes over time in the Saudi stock market. Using structural break analysis, the research identifies shifts in the sensitivity of stock prices to illiquidity. A Markov switching model is then applied to understand these changes. The results indicate that small firms experience two distinct regimes, with illiquidity shocks reducing stock prices in the first regime ten times more than in the second. For large firms, stock price responses to illiquidity shocks vary across three regimes: in the first, prices decrease; in the second, prices remain stable; and in the third, prices drop sharply. Further analysis shows that higher market volatility significantly increases the impact of illiquidity shocks on small firms, while large firms are more sensitive to illiquidity shocks following periods of negative market performance. The study finds no evidence that changes in oil prices influence the relationship between illiquidity shocks and stock prices. These findings provide valuable insights for investors to predict periods of high illiquidity risk and implement effective investment strategies. (c) 2025 The Authors. Published by IASE. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).