Stock Market Development and Economic Growth: Empirical Evidence for Emerging Market Economies

Abstract

Contemporary economies of developing countries are changing due to rapid changes in the world economy. The economies of emerging market countries are witnessing changes in the composition of capital flows because world stock markets are expanding rapidly. Foreign direct investment and stock market boom are the indicators of the changing world economic order. The objective of this study is to examine the relationship between stock market development and economic Growth. Empirically, based on the data for 17 emerging market and 10 developed market economies during the 12 years’ period, from 2000 - 2011 using the generalized method of momentum (GMM) for dynamic panel data. To control for the country specific effect, the model is further estimated for the developed and emerging member economies. The key findings of the study reveal that there exists statistically significant relationship between stock market development and economic growth both directly, as well as indirectly by boosting investment behavior. The results also indicate robustly that stock market development is an important wheel for economic growth