Stock market-growth Nexuses: An application of dynamic panel data analysis for developed and emerging markets
No Thumbnail Available
Date
2015
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Uva Wellassa University of Sri Lanka
Abstract
Stock market is one of the key players in the financial system which provides the long term capital requirements for the investment projects that drive the long run economic growth. However, there is no consensus yet about the existence of Finance Led Growth Hypothesis and the Growth Led Finance Hypothesis. In particular, scholars such as McKinnon (1973), Show (1973), Bencivenga and Smith (1991) and Beck and Levine (2004) were confirmed the Finance Led Growth Hypothesis while Patrick (1966), Ireland (1994), Dritskai and Melina (2005) and Capasso (2006) were supported for Growth Led Finance Hypothesis. Additionally, Lucas (1988) was emphasized that role of the stock market has been “Over-Stressed” by the financial literature. The current study attempts to resolve the conflicting views in the literature and also the methodological and estimation problems by employing GMM, Dynamic Panel Data Analysis for both developed and emerging markets over the period of 1990 - 2010.
Methodology
The study has focused on 20 developed and emerging markets. The annual data were collected from the World Bank data series over the period of 1990-2010. Mainly, Dynamic Panel data analysis was carried out based on Generalized Method of Moment (GMM) to model the stock-growth linkages. Further, Im, Pesaran and Shin (IPS) and Augmented Dickey-Fuller (ADF), Panel Unit Roots tests together with Pedroni Panel Co-integration test and Kao Panel Co-integration test were employed to check the stationary and the co-integration respectively. The estimated empirical models can be interpreted as follows.
Where, STOCK is a composite index for stock market development which was calculated incorporating market capitalization, total value traded and stock market turnover ratio. Similarly, lnRGDP refers to the log value of the real GDP and X is the vector of explanatory variables. Since, there is no consensus about the direction of the causality between stock market development and economic growth yet; both equation (1) and (2) constructed by changing the dependent variable. The equation (1) examines whether the stock market development promotes the economic growth while the 2nd captures the reverse causality which supports the Growth-Led Finance hypothesis. The endogeneity problem was overcome by introducing the lag values of the regressors’ as the instruments based on the following moment conditions.
Description
Keywords
Stock Market, Entrepreneurship and management, Financial Management, Marketing, Business Management