Stock market development and economic growth: The role of institutional quality

In the recent past, with the phenomenal growth of equity markets, a burgeoning number of policy makers and researchers began to query about the possible impact that equity market development might have on economic growth. Indeed, an overwhelming number of studies have been carried out worldwide to investigate the links which might exist between stock market development and economic growth. As a result, this has strengthened the view that stock markets around the world play a key role in fueling a powerful and resilient economy. However, most of these studies have focused solely on developed countries and not on developing countries or small island developing economies like Mauritius. As such, since studies analyzing this link in the African region are rather scant, this paper endeavors to scrutinize the relationship between equity market development and economic growth in Mauritius. To this end, this paper analyzes the relationship between stock market development, banking development and economic growth in a unified framework using semi-annual data for the period 1988-2011, through a dynamic Vector Error Correction Model (VECM). The VECM is used extensively to determine the link between stock market development and economic growth while simultaneously allowing identification of any bi-directional and/or uni-directional causality between the variables of interest. Moreover, this model divulges both the direct and the indirect impacts, if any, which stock market development might have on economic growth. Possible determinants of stock market development and the effect of stock market development on the control variables are also analyzed through the VECM. The results suggest that stock market development does play an important role in generating gains in terms of economic growth in the long run in the island. In the short run however, stock market development fails to significantly boost economic growth in Mauritius. Moreover, stock market development is also seen to indirectly stimulate economic growth in the short run, through banking development. Interestingly, banking development is seen to have a positive impact on economic growth, both in the short run and in the long run. This indicates that banking development and stock market development both complement each other. As such, it is believed that further steps have to be taken to promote stock market development in the island, with the aim of boosting both the economy and the banking sector in the long run.

Most previous studies examining the effect of financial and stock market development on economic growth did not consider the different levels of economic development, assuming that the effect is same at all stages of economic development. Thus, previous literature is unable to sufficiently explain the recent economic crisis caused by the excessive development of financial markets in developed economies. This study analyzes the effect of financial and stock market development on economic growth considering countries’ varying levels of development, using a dynamic panel generalized method of moments on a panel data for 94 countries from 1976 to 2005. The results show that for high-income countries, the effect of financial and stock market development on economic growth is negative. However, if such countries develop their financial markets with their manufacturing industries, the effect becomes positive. This study presents policy recommendations emphasizing the significance of combining financial development with real economic development.

Unveiling the causal relationships among banking competition, stock and insurance market development, and economic growth in Europe

Using panel data of 42 countries from 2001 to 2019, we examine whether political uncertainty (caused by uncertainty about national elections) explains variations in cross‐country liquidity, market size, and transaction cost. We also investigate whether institutional quality moderates the negative effects of political uncertainty on stock market development. We show that political uncertainty reduces stock market size, liquidity, and increases transaction costs. Our results indicate that institutional quality moderates the negative effects of political uncertainty on stock market development. However, we find no effects in emerging markets arising from the high prevalence of weak institutions. We confirm the robustness of our findings using alternative financial development measures and endogeneity. This study enhances our understanding of the salient role of political uncertainty in the development of the stock market, with important implications for market regulators, corporations, and investors.

In this paper, the dynamic causal relationship between stock market development and economic growth in South Africa is examined – using the newly developed ARDL-Bounds testing procedure. The study uses three proxies of stock market development, namely stock market capitalisation, stock market traded value and stock market turnover, against real GDP per capita, a proxy for economic growth. Using the 1971-2007 data sets, the empirical results of this study show that the causal relationship between stock market development and economic growth is sensitive to the proxy used for measuring the stock market development. When the stock market capitalisation is used as a proxy for stock market development, the economic growth is found to Granger-cause stock market development. However, when the stock market traded value and the stock market turnover are used, the stock market development seems to Granger-cause economic growth. Overall, the study finds the causal flow from stock market development to economic growth to predominate. The results apply irrespective of whether the causality is estimated in the short-run or in the long-run.

PurposeThe purpose of this paper is to investigate the short and long run causal relationship between stock market development and economic growth in sub-Saharan Africa within the period 1990 and 2020.Design/methodology/approachUsing panel data from 1990–2020 obtained from the World Bank development indicators, the study makes use of the autoregressive distributed lag model and the Granger causality and cointegration to analyze the long and short run causal relationship between stock market development and economic growth in sub-Saharan Africa.FindingsThe findings unveiled that stock market capitalization had a positive and significant effect on economic growth in the long run and a negative insignificant effect in the short run within the period of 1990–2020 while stock market liquidity measured through total value of shares traded and turnover ratio had a negative and significant effect on economic growth in sub-Saharan Africa within the period of 1990–2020. The Granger causality test showed an inconclusive result between stock market development and economic growth; implying that the authors cannot say if it is stock market development that causes economic growth or it is economic growth that causes stock market development within the period of 1990–2020.Practical implicationsThe findings suggest that governments of sub-Saharan African countries should encourage stock market development by implementing favorable rules for companies listing on their stock market, promote stock market integration with world markets to diversify risk, increase public awareness on stock markets, increase investors' confidence level and finally, remove stock market impediments like high taxes, legal and regulatory barriers to its development.Originality/valueThis study contributes to the existing literature by offering a whole new perspective on stock market development and economic growth since its conception in sub-Saharan Africa. Again, contrary to other papers, the study show how stock market development can contribute to the growth of sub-Saharan Africans’ economy.

Rapid development of financial markets particularly stock markets has been a main feature of many emerging markets. The conventionally held view, which has a basis in the seminal work of Schumpeter (1911), is that the stock market development is beneficial to the economy since it provides liquidity and an avenue for risk sharing and diversification, allows efficient allocation of resources to productive investment, reduces information and transaction costs and, consequently allows firms to undertake profitable investments. This view has been supported by various early empirical studies noting a positive relation between stock market development and economic growth. It has also been supported by recent studies utilizing advanced time series econometrics and finding the causal influences of stock market development on economic performance. Still, against this view and empirical evidence, some have also noted potential detrimental effects of stock market development through saving reduction, facilitation of counterproductive corporate takeovers, attraction of speculative inflows and reversal of financial capitals. The questions as to whether the stock market development influences macroeconomic performance and whether it can be employed as a development policy strategy are particularly relevant for emerging or developing economies. Over the past years, these economies have attempted to promote their stock markets with the objective of improving resource allocation and, consequently, of propelling their economic growth. However, after especially the liberalization of their financial markets, they have been exposed to sharp swings and wide fluctuations of their market performance, which may have inflicted detrimental impacts on macroeconomic performance. In this regards, the 1997/1998 Asian crisis, which started in Thailand and propagated to other Asian economies, is a good example. In looking at whether stock market development contributes to macroeconomic performance, existing studies have mainly looked at the relation between stock market development indicators and measures of economic performance using a linear regression model or has ascertained the causal relations that run from the stock market development indicators to macroeconomic variables using such approached as Granger causality, vector error correction modeling (VECM) and vector autoregressive modeling (VAR). While it is essential to document a strong relation between them, the linear regression model is not sufficient to establish causation. Moreover, the employment of a dynamic model such as the VAR or VECM and the finding of a causal pattern that runs from the stock market development to economic growth are not sufficient for policy prescription. This stems from the fact their relation or causal influences may shift due to the shift in regimes, signifying that the stock market development cannot be employed as a policy variable. In short, their relations are the subject of the well-known Lucas critique. In this paper, we utilize a 4-variable framework and quarterly data from 1993 to 2007 to examine the stock market and macroeconomic performance relation for Thailand. To this end, we first evaluate the causal patterns between a measure of stock market development and measures of macroeconomic performance, which is essential to evaluate whether stock market development 'causes' growth. Then, we assess whether the relations between the two main variables, i.e. measures of stock market development and macroeconomic performance, are structurally invariant to policy shifts. Hence, in addition to using standard time-series econometrics of cointegration and vector autoregressions (VAR), we alo examine within the error correction setting the superexogeneity of the stock market development. More specifically, to make a strong case for promotion of the stock market as a development strategy, the stock market development must be superexogenous since their relationship is structurally invariant to policy shifts and, accordingly, circumventing the famous Lucas critique in making policy recommendation. The cointegration test results suggest the presence of a long run relationship among the variables, namely, real gross domestic product (GDP), market capitalization ratio, investment ratio, and the aggregate price level. Further, the impulse-response functions and variance decompositions simulated from the estimated VAR models clearly indicate positive and sizeable contributions of stock market development to real GDP as well as investment ratio. Finally, the superexogeneity test indicates that the stock market development is superexogenous in the system. Thus, the relation between economic development and stock market development is structurally invariant to policy shifts. In the case of Thailand, there is a strong case for policy prescription to promote the development of its stock market as a catalyst to economic growth.http://dx.doi.org/10.5755/j01.ee.22.3.513

The article is devoted to the study of the current state, problems and prospects of development of the Ukrainian stock market. It is proved that the stock market is a tool for implementing the state's Innovation Policy and a priority factor in mobilizing financial and capital resources. Stock market commodities are securities (stocks, bonds, etc.). Trends, features of functioning and development of the Ukrainian stock market are analysed. The analysis of the main indicators of exchanges, the structure and volume of exchange contracts with securities is carried out. The structural distribution of exchange contracts by trading organizers is established. The analysis of operations with securities on the organized market, unorganized market and stock exchanges of the country is carried out. The largest volume of trading on financial instruments on trade organizers in 2019 was recorded with government bonds of Ukraine – UAH 295 billion according to the National Securities and stock market Commission, the exchange market during 2019 saw consolidation of securities trading on two stock exchanges “Perspektyva” and “PFTS Ukraine Stock Exchange”: 98.7% of the value of exchange contracts. Analysis of the main indicators that determine the state of the stock market has shown that the modern securities market of Ukraine is characterized by an extremely high degree of fragmentation, limited liquidity and a variety of types of securities, which, in turn, are the main obstacles to the development of the stock market and the capital market as a whole. Attention is focused on the main problems that hinder the functioning of the stock market. It is proved that the development of the stock market is hindered by: insufficient competitiveness of the domestic stock market; imperfect tax incentives for market development; low level of corporate governance development; imperfect regulatory and legislative framework of Ukraine; low liquidity and capitalization. The directions of development of the stock market of Ukraine are proposed: improving the efficiency of regulation of issuers; stimulating the inflow of investment to the stock market; ensuring reliable and efficient functioning of the market infrastructure; ensuring the functioning of the unified state policy for stimulating the improvement of the investment climate.

Purpose The paper investigates whether Granger causal relationships exist between bond market development, stock market development, economic growth and two other macroeconomic variables, namely, inflation rate and real interest rate. The study aims to expand the domain of economic growth by including a more in-depth analysis of the possible impact that bond market and stock market development has on economic growth than is normally found in the literature. Design/methodology/approach This paper uses a panel data set of the G-20 countries for the period 1991-2016. It uses a panel vector auto-regression model to reveal the nature of any Granger causality among the five variables. Findings The paper provides empirical insights that both bond market development and stock market development are cointegrated with economic growth, inflation rate and real interest rate. The most robust result from the panel Granger causality test is that bond market development, stock market development, inflation rate and real interest rate are demonstrable drivers of economic growth in the long run. Research limitations/implications Because of the chosen research approach, the research results may lack theoretical foundations. Therefore, perhaps the more fully grounded interactive findings of this study can inspire theorists to fill the missing gap. Practical implications This paper includes lessons for policymakers in the G-20 countries seeking to stimulate economic growth in the long run and how they need to ensure greater stability of the interest rate and inflation rate as well as fully developing their financial markets, as both bond markets and stock markets are obvious drivers of economic growth. Originality/value This paper fulfills an identified need to study causal relationships between bond market development, stock market development, economic growth and two other macroeconomic variables, i.e. inflation rate and real interest rate.

The present paper tests empirically the existence of a causal relationship between the economic growth and the development in the banking and stock market in ex transition economies, recently member states of the EU and especially the case of Bulgaria. The Johansen cointegration test indicated a sole relationship between the banking sector, the stock market and the economic growth, while the application of the Granger causality/block exogeneity test indicated a bilateral relationship between the economic growth and the development in the stock market, as well as between the economic growth and the development in banking sector. Finally, no casual relationship was confirmed between the development in credit and stock market.

This paper examines the relationship between stock market development and economic growth using time-series data from Hong Kong. The study uses three proxies of stock market development, namely: stock market capitalisation, stock market traded value, and stock market turnover. Given the weaknesses associated with the traditional co-integration techniques, the current study uses the recently introduced ARDL-bounds testing approach to examine the nexus between stock market development and economic growth in a dynamic setting. The empirical results show that the direction of causality between stock market development and economic growth depends on the proxy used to measure the level of stock market development. When stock market capitalisation is used as a proxy for stock market development, a distinct unidirectional causal flow from stock market development to economic growth is found to prevail, without any feedback. However, when stock market turnover is used, a causal flow from economic growth to stock market development is found to prevail in the short run and in the long run, while a causal flow from stock market development to economic growth is only found in the short run. The causality between stock market traded value and economic growth, however, failed to yield any long-run causal relationship from either direction. Only a short-run causality flow from economic growth to stock market traded value could be detected in this case.

The stock market represents a major source of long-term funds. However, the Nigerian stock market lacks depth due to the weak regulatory system and legal framework. Extant studies have shown that both institutional quality and openness are enablers of the stock market. An analysis of the effects of institutional quality and openness on the development of the Nigerian stock market from 1996 to 2021 is therefore crucial. The Auto Regressive Distributive Lag (ARDL) method is used to analyze data from World Bank databases and the Lane-Milesi Ferreti index, with results showing that institutional quality has a positive and significant impact on stock market development in Nigeria. Meanwhile, development of the stock market, institutional quality, and openness are related over the long term based on the ARDL bounds test. A further finding revealed that the development of Nigeria’s banking sector and the exchange rate had positive (negative) effects on the development of the stock market, respectively. Additionally, stock market liquidity contributed to development of the market. This study came to the conclusion that an enabling stock market in Nigeria could be strengthened by the interaction of institutional quality and openness. The study concludes that strengthening Nigeria’s governance institutions through the creation of an appropriate legal framework is necessary to ensure political stability and the absence of violence in the country’s political system. Besides, the government really needs to grant autonomy to agencies in charge of tackling corruption to enable them to enjoy simultaneous openness. Monetary authorities should also ensure exchange rate stability and improved credit for domestic investment activities.

This study investigated the causal relationship bet ween stock market development and economic growth for Greece for the period 1978-2007 using a Vector Error Correction Model (VECM). Questions were raised whether stock market development causes economic growth taking into account the negative effect of interest rate on stock market development. The p urpose of this study was to investigate the short-r un and the long-run relationship between the examined vari ables applying the Johansen co-integration analysis . To achieve this objective unit root tests were carried out for all time series data in their levels and t heir first differences. Johansen co-integration analysis was a pplied to examine whether the variables are cointegrated of the same order taking into account th e maximum eigenvalues and trace statistics tests. Finally, a vector error correction model was select ed to investigate the long-run relationship between stock market development and economic growth. A short-run increase of economic growth per 1% induced an increase of stock market index 0.41% in Greece, whi le an increase of interest rate per 1% induced a relative decrease of stock market index per 1.42% i n Greece. The estimated coefficient of error correc tion term was statistically significant and had a negati ve sign, which confirmed that there was not any pro blem in the long-run equilibrium between the examined variables. The results of Granger causality tests indicated that there is a unidirectional causality between stock market development and economic growth with direction from economic growth to stock market development and a unidirectional causal relationsh ip between economic growth and interest rate with dire ction from economic growth to interest rate. Therefore, it can be inferred that economic growth has a direct positive effect on stock market develo pment while interest rate has a negative effect on stock market development and economic growth respectively.

This paper investigates the relationship between stock market development and economic growth in Sri Lanka using quarterly data from 1996 to 2011. The stationary of the data are tested using Augmented Dickey Fuller (ADF) test. It was found that all variables are stationary on first differencing. The relationships between economic growth and indicators of stock market development were investigated using Johansen co-integration tests, and vector error correction model (VECM). Co-integration results indicate the existence of long-run association between stock market development and economic growth in Sri Lanka. VECM results show unidirectional causality from stock market development to economic growth despite different variables used to measure the stock market development. The findings support the theoretical prediction that development of stock market would play a key role in economic growth. The study therefore concludes that stock market development leads the economic growth in Sri Lanka and efforts should be devoted to develop the stock market.

The study investigated the relationship between stock market development and economic growth in Belgium using ARDL approach with annual time series data from 1988 to 2012. Real GDP per capita was used as a proxy for economic growth and stock market capitalization as a ratio of GDP as an approximate measure of stock market development. The relationship between stock market development and economic growth falls into four categories which are (1) stock market-led economic growth, (2) economic growth-led stock market development, (3) feedback effect and (4) neutrality hypothesis where the relationship between the two variables does not exist. Despite the existence of these four views on the relationship between stock market and economic growth, it appears from the literature review done by the author that majority of the empirical evidence support the stock market-led economic growth view. The fact that the topic on the directional causality between stock market and economic growth is still inconclusive is the major motivating factor why the author chose to investigate the relationship between the two variables in Belgium. The study observed that there exist an insignificant long run causality running from stock market development towards economic growth in Belgium. This relationship was not detected in the short run. Moreover, the reverse causality from real GDP per capita to stock market capitalization both in the long and short run was not detected in Belgium. These results are at variance with the majority of the empirical findings reviewed earlier on. It could possibly be that certain conditions that are necessary to enable stock market to significantly positively influence economic growth were not in place in Belgium. Therefore, the study urges the Belgium authorities to put in place the right environment, policies and programmes that enable the stock market to play its role of stimulating economic growth.