Abstract
This paper investigates the quality aspect of financial markets in emerging economies and the key variables to achieve a desired level of quality. In our panel analysis, 17 major emerging countries were taken as a sample to analyze the relationship between quality of financial markets and the factors that affect quality. To measure the quality of financial markets, composite indexes were created that reflect the degree of financial market accessibility, depth, and efficiency. Besides, the indexes include the liquidity, diversity, and the institutional environment of financial markets in emerging economies. The variables include financial institutions access, depth, and efficiency on one set and on the other set financial market access, depth, and efficiency. The indexes and sub-indexes were extracted from the database of International Monetary Fund’s International Financial Statistics office that holds global dataset of main indicators. Besides, World Development Indicators (WDI) indexes were employed to the research. We found that quality of financial markets and growth of financial development are highly correlated to each other. The disaggregated components of the quality measure suggest that it is the level of legal and institutional development along with accessibility, depth, and efficiency that affects the overall financial market growth. Hence, financial market quality. Our simple regressions show that the quality measures of financial markets have a positive output on higher quality of financial markets and growth of financial development. The causality of relationships between the components of financial markets and components of financial institutions were proven to have negative correlation showing that countries that pay more attention to the growth of financial institutions usually have less developed financial markets. This is mainly due to the fact that their markets are bank-based markets with highly regulated policies. Keywords: Financial Market Quality, Emerging Economies, Financial Development, Financial market growth DOI: 10.7176/RJFA/12-6-08 Publication date: March 31 st 2021
Highlights
The integral role of financial markets in economic growth is undoubtedly significant
The development of financial markets and financial institutions contributes to the growth of financial development which in turns plays a vital role in the overall economic growth and stability
The tradeoff required between the depth of financial institutions and financial markets indicates the direction and future trend of economic growth in a country
Summary
The integral role of financial markets in economic growth is undoubtedly significant. The Financial Development Index was developed for the IMF staff discussion note “Rethinking Financial Deepening: Stability and Growth in Emerging Markets.” It summarizes how developed financial institutions and financial markets are in terms of their depth (size and liquidity), access (ability of individuals and companies to access financial services), and efficiency (ability of institutions to provide financial services at low cost and with sustainable revenues and the level of activity of capital markets). Financial Development Index was developed for the International Monetary Fund (IMF) staff Discussion Note “Rethinking Financial Deepening: Stability and Growth in Emerging Markets.” It summarizes how developed financial institutions and financial markets are terms of their depth (size and liquidity), access (ability of individuals and companies to access financial services), and efficiency (ability of institutions to provide financial services at low cost and with sustainable revenues and the level of activity of capital markets). Notes: 1. The regressions are estimated using dynamic panel GMM at first difference
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