Abstract
This study explores the relationship between stock market inclusion and economic activity (liveliness) in Turkey by taking advantage of the recent contributions in causality theory. Stock market inclusion is represented by the seasonally adjusted real stock market trade volume per capita (TV) and economic activity by the seasonally adjusted real gross domestic product per capita (GDP). We use quarterly series covering the period 2003:1-2020:2 and employ asymmetric bootstrap and asymmetric Fourier bootstrap causality testing procedures to obtain robust parameter estimates. Both procedures adopt a nonlinear methodology but the latter is distinguished from the first in the sense that it follows a Fourier series approximation which allows for structural breaks of unknown number, form, and point. Empirical findings suggest that the Fourier-type asymmetric bootstrap causality procedure, thanks to its trigonometric components, captures two unidirectional (one-way) causalities; one running from the positive components of TV to those of GDP and the other running from the negative components of TV to those of GDP, but not vice versa. These findings verified a strong influence on GDP of the alterations i.e. positive and negative shocks in stock market conditions.
Highlights
The linkage between the financial markets and economic activity has been established by the famous work of Schumpeter long ago in 1911 (Schumpeter, 1911)
This study explores the relationship between stock market inclusion and economic activity in Turkey by taking advantage of the recent contributions in causality theory
Empirical findings suggest that the Fourier-type asymmetric bootstrap causality procedure, thanks to its trigonometric components, captures two unidirectional causalities; one running from the positive components of trade volume per capita (TV) to those of gross domestic product per capita (GDP) and the other running from the negative components of TV to those of GDP, but not vice versa
Summary
The linkage between the financial markets and economic activity has been established by the famous work of Schumpeter long ago in 1911 (Schumpeter, 1911). Schumpeter claims that the development of the financial markets and banks combined with well-organized regulatory and supervisory financial institutions would facilitate the distribution of productive capital among the most efficient users, which in turn enhance economic growth and real income This argument is later acknowledged by other studies such as Gurley and Shaw (1955), Goldsmith (1969), McKinnon (1973), and Shaw (1973), which are regarded as milestones in the literature. The vast amount of studies in the related literature deal generally with the link between several financial development indicators and real economic activity, i.e. real income and/or its distribution.
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