Financial development and natural resources. Is there a stock market resource curse?

Abstract

This study empirically investigates the financial resource curse, particularly the stock market resource curse, using data from the period 2002-Q1 to 2018-Q4, by considering the natural resource rents on the banking development index, stock market development index, and financial development index for Malaysia, a country that is claimed to evade the resource curse. In addition to economic growth, institutional quality is the primary concern in the resource-finance literature and is also considered in the nexus by applying the latest econometric techniques. This study applied the Fourier ADF unit root test and Fourier GLS in addition to the structural break unit root test for cointegration. The recently developed Bootstrapped ARDL has been applied to determine the long-run relationship. Additionally, the robustness of the BARDL is carried out by the recently proposed Fourier ARDL. Moreover, the long-run elasticity has been estimated using Dynamic Ordinary Least Square (DOLS). Further, the variables’ casual interaction is investigated using the novel single Fourier frequency and cumulative Fourier frequency approach. This study reveals new and robust empirical findings demonstrating the financial resource curse in the banking sector. However, the study found a significant positive relationship between natural resources and stock market development, thus validating the stock market resource blessing hypothesis in addition to the overall financial resource blessing. Economic growth is positively related to banking and stock market development. Furthermore, a negative relationship was shown between institutional quality and stock market development. A bidirectional relationship exists between institutional quality and natural resources as well as between natural resources and economic growth. Natural resource revenue can boost economic growth by efficiently channelling the windfall revenue through banks and the stock market in strengthening the institutional quality.