The Role of Political Instability in Stock Market Development and Economic Growth: The Case of Greece

Abstract

This article examines empirically the relationship between stock market development, political instability and economic growth in Greece. We measure socio‐political instability by constructing an index which captures the occurrence of various phenomena of political violence using time‐series data. The main advantages of analysing political instability in a case study framework using time‐series, in contrast with the widely used cross‐country empirical studies, are: (a) a more careful and in‐depth examination of institutional and historical characteristics of a particular country; (b) the use of a data set comprised of the most appropriate and highest quality measures; and (c) a more detailed exposition of the dynamic evolution of the economy. The empirical results indicate the existence of a strong negative relationship between uncertain socio‐political conditions and the general index of the Athens Stock Exchange (ASE) and support the theoretical hypothesis that uncertain socio‐political conditions affect economic growth negatively, is true for the Greek case.(J.E.L.: G10, G14, O40, C32)