This paper investigates the impact of uncertainty, specifically from oil market volatility, geopolitical risk, and global economic uncertainty, on Saudi Arabia's financial development and economic growth. The study's importance stems from the inherent instability of the global economy, particularly the oil market and geopolitical landscape, and the need for robust economic policies that account for these uncertainties. Saudi Arabia serves as a compelling case study due to its significant global economic position and the recent surge in its stock market value, partly attributed to reforms under Vision 2030. The paper aims to analyze the impact of positive and negative shocks from these uncertainty sources on Saudi Arabia's economic growth and financial development in the short, medium, and long run. The understanding gained can inform economic policy decisions to strengthen the nation's financial and economic resilience against uncertainty.

Existing literature extensively explores the link between economic performance and uncertainty shocks, especially those stemming from oil market fluctuations. Studies have shown varied impacts of oil price volatility on economic growth, depending on whether a country is an importer or exporter. For Saudi Arabia, as a major exporter, increases generally have a positive effect. Research also examines the impact of geopolitical risk (GPR) and economic policy uncertainty (EPU). GPR's impact on investment decisions and economic cycles is highlighted, alongside EPU's role in weakening economies. Previous research on Saudi Arabia and the broader GCC and MENA regions is limited. Some studies investigate the impact of US economic policy uncertainty and broader uncertainty on GCC financial markets, revealing negative effects. However, comprehensive analyses of the asymmetric effects of various uncertainty indices on both financial development and economic growth in a frequency domain framework for Saudi Arabia are lacking. This study aims to fill this gap.

This study uses annual data from 1993 to 2020 to analyze the relationships between uncertainty indices (crude oil volatility (VTOIL), geopolitical risk index (GPR), world uncertainty index (WUI)), financial development (measured by market capitalization to GDP ratio (MCGDP) and financial institutions access index (FIAIX)), and economic growth (EG). Crude oil volatility is estimated using a TGARCH(1,1) model. The main methodology employed is spectral Granger causality analysis, a frequency domain approach, to examine causal relationships between these variables at different frequencies (representing short, medium, and long-term effects). This approach helps to disentangle short-term and long-term causal effects. Sensitivity analysis, including tests for residual autocorrelation, normality, and heteroscedasticity, is performed to validate the VAR models used in the spectral Granger causality analysis. Impulse response functions (IRFs) are used to further investigate the dynamic effects of uncertainty shocks on the economic variables. A robustness analysis is performed using quarterly data (2015Q1-2022Q4) and replacing GDP with the industrial production index (IPI).

The spectral Granger causality analysis reveals several key findings. Regarding financial development, negative shocks to crude oil volatility have a significant long-term causal effect on MCGDP, primarily due to capital flight and reduced domestic investment. However, the impact on FIAIX is less pronounced, suggesting that the banking sector is more resilient to oil price fluctuations. Geopolitical risk shows significant long-term causality with MCGDP but mixed results for FIAIX, indicating the banking sector's vulnerability to geopolitical tensions. Global economic uncertainty has a limited direct effect on the FIAIX. In terms of economic growth, positive oil price shocks have a greater impact than negative shocks. The robustness analysis using quarterly data and IPI largely supports the findings from the annual data analysis. The Impulse Response Functions (IRFs) offer further insights into the dynamic effects of shocks. For instance, negative shocks to crude oil volatility lead to a decrease in domestic investment but government spending helps mitigate the negative impact on MCGDP. Similarly, negative geopolitical risks lead to capital flight (FORINVEST), but government spending offsets some of these negative impacts. Global uncertainty shocks also negatively impact the MCGDP, but not the FIAIX. These impacts are evident across short, medium, and long-term horizons, with the long-term effects frequently being the most prominent.

The findings address the research question by demonstrating the differential impacts of various uncertainty sources on Saudi Arabia's economy, highlighting the varying resilience of different sectors. The frequency domain analysis allows for a nuanced understanding of the short, medium, and long-term effects, providing valuable insights into the time-varying nature of these relationships. The significant impact of negative oil price shocks, especially on market capitalization, underlines the importance of diversification strategies. The results highlight the importance of effective fiscal policy in mitigating the negative impacts of uncertainty shocks, as evidenced by the significant role of government spending in counteracting the effects of both oil price and geopolitical risk shocks. The resilience of the banking sector to global economic uncertainty suggests a relatively well-regulated and stable system. However, the vulnerability to oil price and geopolitical shocks necessitates enhanced risk management strategies within the sector. The results contribute to a more comprehensive understanding of the transmission mechanisms of uncertainty shocks within the Saudi Arabian economy, and the relative efficacy of different policy responses.

This study contributes to the literature by providing a comprehensive analysis of the impact of various uncertainty sources on Saudi Arabia's financial development and economic growth using spectral Granger causality analysis and IRFs. The findings underscore the importance of economic diversification, strengthening the financial sector's resilience, and managing geopolitical risks. Future research could explore the role of global economic policy uncertainty, conduct cross-country comparisons within the MENA region, and examine the asymmetric effects in more detail using monthly data. Furthermore, incorporating additional variables, such as government debt, and exploring the use of newer frequency methods, could provide richer insights.

This study has some limitations. It does not consider global economic policy uncertainty as a separate variable, which could have an impact on the results. Furthermore, using annual data may hide some of the short-term dynamics, and the analysis is limited to the Saudi Arabian context, without cross-country comparisons. The reliance on a specific model (TGARCH) for estimating oil volatility could also influence the findings. Finally, the study does not incorporate the potential influence of the COVID-19 pandemic, which might have significantly affected some of the variables during the latter part of the study period.